Happy New Year! Don't you just love a brand new start? Every 365 days we get a do-over. A chance to prove that this time we can do things "right/smarter"...make better choices, live for ourselves and not for others, trust our instincts, lead with kindness, not get into credit card debt, basically find a better balance between enjoying today and preparing for tomorrow.
We applaud your for taking the time to read the Financial Cliffnotes blog, hopefully strengthening your ability to make smarter money decisions for YOUR future. We've said it before and we'll say it again, "if you don't plan for your future, who will?".
"if you don't plan for
your future, who will?"
So, to the point at hand.. it's bonus season. Most of us get an annual bonus but whether you get a year-end bonus, a holiday bonus, a quarterly commission, or a nice little birthday check from grandma, this money plan is a good idea for just about all "windfall" situations. Why?
To Avoid Lifestyle Creep
When you don't have some sort of plan in place, you usually end up with little to nothing to show for life's little wins. How many times have you thought, "when I make more money, I'll be able to save more, spend more, travel more, etc."? But then after a few years of making more money you realize, you feel the same as before - with little to nothing to show for that raise or promotion. We call this lifestyle creep.
Let's put an end to it right now. You work hard for your money and we believe you should have something to show for it.
What To Do With Your Bonus
Before you get used to that extra cash sitting around, do this:
Put 10% to your future
Start with your Emergency Fund. If you've been reading Stash's stuff, you know that you should keep your Emergency Fund at an online bank in a savings account. CapitalOne360 is our top pick but Ally is a close second because they pay a slightly higher interest rate. Once you have 3 months worth of your fixed expenses (rent, car payment, phone bill, etc.) set aside, move on to retirement accounts.
Assuming you're maxing your 401(k) match, max our your Roth IRA next, if eligible. Don't forget, the Roth IRA, itself, isn't an investment. It's just an account like any other checking or savings account. It just happens to have certain rules on it - like you can't touch the money in the account until you're 59 1/2 (without penalties). The easiest way to invest this money without the help of a professional is to use a Target Date Fund that lines up with the year you plan to retire. Vanguard has a good selection.
If you still have some money left over, first of all that's awesome. Second of all, instead leaving the money in a savings account, you're probably ready for a Stash Plan™ so you can start putting a plan in place for other fun (possibly family) goals. Click here to learn more about the Stash Plan™.
Put 20% to paying down debt
Start with your credit cards first because these usually carry the highest interest rates. Be aggressive - have no mercy! We want that debt gone gone gone.
If credit card debt isn't your problem, put the money towards paying down principle on your student loans.
No student loans? Put it towards your mortgage.
No mortgage? Circle back above and put it towards saving for a future pre-retirement goal. Whatever you do, DO NOT keep it in your checking account.
Use 70% to treat yo self
When we say blow it, we mean it. Enjoy that money!
If you are using 30% of it to for things like saving and debt, you're #adulting hard, possibly too hard.
Go out to a fancy dinner, buy an unnecessary luxury, take a spontaneous trip, go to the spa.
If the thought of blowing your money makes you slightly nauseous, think about something else you want, a new couch, a more expensive lease, 10 new bathing suits next summer, set aside some money in a savings account for that goal AND THEN spend the rest.
In case you're paying attention (or you're a client of Stash), you'll probably recognize these numbers as the Reverse Budget™. Good catch!!
P.s. This system works great for your tax refund as well.