How should I spend my year-end bonus?

Post by 
Birgo

Many employers have responded generously to the COVID-19 pandemic. In 2021, nearly a quarter of employers offered employees year-end bonuses, and most of those employers have also increased the size of year-end bonuses. As of 2021, the average bonus-receiver will probably end up with about 11% of their salary by the end of the year.

For most people, that’s a decent chunk of change. It begs the question: what should you do with it?

(Obligatory disclaimer: we’re real estate professionals, not financial advisors. We are not providing financial advice.  If you need financial advice, seek out a financial advisor.)

Instant Gratification

You could always install a pool. Okay, that’s a joke. Kind of. If you decide to go full Clark Griswold, don’t pull the trigger until you know you are getting a juicy check rather than a jelly-of-the-month subscription. 

How to Think about Bonuses

A more forward-looking strategy is to use the bonus to support your financial goals.

Psychologically, most of us think about large sums of money received at once as windfalls or gifts. Especially when you attach words like ‘bonus’ to the distributions, some people wind up considering them more like expendable fun money than as 'income.'

The problem: employers consider bonuses as part of employee compensation, and budget the expense accordingly. Of course, many bonuses are tethered to employee productivity or performance. This creates an incentive for employees to work harder, but it doesn’t change the fundamental bottom-line calculation: a bonus is part of your hard-earned income, and deserves to be treated as such.

How to Divide Your Bonus

Budgeting is hard. Money doesn’t always end up going exactly where you think it will.

It’d be pretty unrealistic for us to insist that no part of anyone’s bonus should go towards fun and purchases. If you are financially secure, there’s nothing wrong with buying some new clothes, workout equipment, or starting a vacation fund. Treat yourself!

For many people, additional income can be game-changing. If one of your New Year’s Resolutions is improving your financial literacy, there’s a few ways a bonus can help you plan for the future.

  1. Pay down high-interest debt. Debt can be a powerful financial tool, enabling you to fund purchases that most people can’t realistically expect to pay for in cash (e.x. buying a house or paying for your education). Depending on the interest rate, it can also weigh you down and reduce your paycheck significantly. Financially speaking, this is the equivalent of setting money on fire. If you’re carrying credit card debt, or servicing similar high-interest loans, get those out of the way first.
  2. Save for the future. Everyone has a different situation. Whether you’re saving for a house, a car, a college fund, or an engagement ring, it’s probably smart to set aside a cut of your bonus and invest in a fairly safe, low-volatility asset class. It’ll earn you money while you wait to hit your target, and if you pick a fairly liquid investment strategy, you’ll be able to access it when you need it.
  3. Create an emergency fund. This — much like first-aid kits, plungers, and insurance — falls into the category of ‘things you hope you’ll never need.’ But if the need arises, you’ll be glad to have it. If you’re carrying high-interest debt, you should probably eliminate that before setting aside an emergency fund. Three months of living expenses is a good place to start.

These financial strategies can be boring. They aren't interesting or fun, and probably don't meaningfully improve your daily life. But, over the long haul, their importance is hard to overstate.

And hey, if you have some money left over, maybe you can put a down payment on a pool.

Keep Up With Birgo

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
THere's More

Posts You Might Also Like

Birgo Capital

5 Financial Resolutions for the New Year

Financial security is a marathon, not a sprint. It requires building life-long habits and focusing on financial healthy, the dividends of which are measured in years or decades, not a few weeks in January. But, many of us like to use the New Year as an opportunity to see where we are, and plan for the future. Here are five financial resolutions for the new year.
Birgo Capital

5 Iconic Christmas Real Estate Properties

The best way to spread Christmas cheer is singing loud for all to hear... or by making a list of some iconic real estate assets that boast Christmas cheer.
Birgo Capital

Can You Invest in Christmas Trees?

About 30 million live trees are sold every year in the United States. Most of them are sold the weekend after Thanksgiving, and, according to the American Christmas Tree Association , the average live tree costs about $78. Consumers spend over $2 billion on Christmas trees annually.
Birgo Capital

What Types of REITs Can You Invest In?

Almost 1,100 REITs are available in the U.S. alone. While we think residential real estate is the best real estate investment, the world of real estate investing offers numerous options that fit investors with different risk tolerances and financial goals. The most popular categories of REITs include residential, retail, office, and mortgage.
Birgo Capital

5 real estate organizations that make the world a better place

Having a passion for real estate and helping people in need can go hand in hand. The holiday season is a time to be more charitable so we encourage you to mix your passion for real estate and volunteerism to give back to the community.