While many people want to use their yearly bonuses on impulsive purchases, one financial expert recommends using the money wisely to meet financial goals.
Build an emergency fund
Business of Your Life Financial Planner Alicia Reiss told Yahoo Finance Live (video above) that employees should use their supplemental money in a strategic way.
“The way that I like to approach a bonus is — or other lump sum of money — is to think about it strategically when you’re looking over your financial plan and your financial goals,” Reiss said.
Reiss recommends that workers who get a bonus build up an emergency fund with that extra money.
“For most people, we would probably start with making sure that they had enough cash reserves set aside in an emergency cash savings account,” said Reiss.
Pay off debt
Just as a bonus amount varies, financial goals do, too. Reiss said that when people receive a bonus, they can use it to pay off any outstanding debt in addition to saving money.
“We don’t need to just focus on one financial planning goal. It’s possible to make progress in different areas. So, you know, after taking a look at maybe a cash reserve and any outstanding high interest debt that you have,” said Reiss.
Invest for short and long-term goals
Reiss also recommends using bonuses to invest in IRAs (individual retirement accounts). People and their spouses can contribute earned income to an IRA for 2022 and even have some time to contribute for 2021 until the tax deadline of April 18.
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Reiss also wants people who get a bonus to invest in an often forgotten investment option, a taxable brokerage account.
“It’s different than a savings account in that you actually can keep cash, but you have the ability to invest that money,” Reiss noted.
Reiss recommends that people invest their bonuses differently depending on their short-term and long-term financial goals to make them inflation-proof.
“If it’s more short-term money that we’re talking about and if interest rates are not moving up in terms of a savings account or CD, and we’re looking for another cash-like investment, we can certainly look at bonds that keep up with inflation,” Reiss said.
“If we were investing for the long-term, it would be in equities,” Reiss added.
Ella Vincent is the personal finance reporter for Yahoo Money. Follow her on Twitter at @bookgirlchicago.