Thousands of workers across the country have been promised bonuses in the wake of the GOP-led tax reform package. But what a consumer does with such a windfall can be just as important.
Companies distributing bonuses to employees include Comcast
Bank of America
and The Walt Disney Company
Some have criticized companies for offering bonuses rather than taking other steps that could create more long-term benefits, such as providing raises or improving matches on retirement plans.
An unexpected windfall can also present a dilemma for many workers, said Seth Corkin, personal chief financial officer at Single Point Partners, a financial planning firm in Boston. “There are no universal good or bad ideas, for the most part. Each person’s financial situation and objectives are different and what they do with the money will reflect that.”
Here is how workers approach their bonuses, based on responses from more than 40 personal finance experts:
Stash the $1,000 aside for a rainy day
The vast majority of financial experts that MarketWatch surveyed for this story suggested that at least some of the money be set aside to start or to grow an emergency savings account.
Many Americans are one emergency away from financial ruin. A Federal Reserve survey found that nearly half of Americans don’t have enough savings on hand to pay for a $400 emergency. Millennials are in particularly dire straits: Over a third of people aged 18 to 36 said they had no money set aside for an emergency, according to another poll.
Pay off that credit-card debt…
Most experts advised that consumers pay off debt. Given that credit-card debt recently surpassed $1 trillion, that may not be a bad idea.
“Money you don’t spend on interest is a guaranteed return you cannot get anywhere else,” said Brendan Mullooly, a certified financial planner and investment advisor with Mullooly Asset Management in Wall Township, N.J.
…but not all debt is bad debt
But not all debt is necessarily bad debt, warned Allison Alexander, a financial advisor with Savant Capital Management in Rockford, Ill. For instance, a mortgage interest rate will be typically lower than a credit card. And $1,000 will not make a significant dent for most Americans.
Ask about topping up your 401(k)
Employees should check with their company to see if they can use the bonus to contribute to their 401(k). Not only will this keep the investment in line with a consumer’s retirement planning objectives, but it can also have some tax benefits.
…but not all investments are equal
If you want to take a riskier approach like buying bitcoin
or participating in a flashy IPO, make sure you can afford to do so, said Mark Struthers, a certified financial planner and founder of fiduciary firm Sona Financial. “If it is truly play money, then yes, consider a very risky gamble,” Struthers said.
Use your existing investment allocations to guide your risk tolerance, John Bucsek, CEO of MassMutual Tri State, said. And if you are already a high-risk investor, say in options or leveraged exchange-traded funds? Ask yourself if even more aggressive investing is prudent.
Don’t be afraid to spend the bonus on yourself
Some advisers suggested splashing out — but doing so wisely. Is there a home maintenance project that needs tackling, such as a fresh coat of paint in the bathroom? Could your car use some new tires? Now is the time to make those purchases.
Otherwise, consider ways to put the bonus toward self-improvement. “Take a course or pursue a certification in conjunction with your work,” said Jeff Jones, lead financial planner at Longview Financial Advisors in Huntsville, Ala. “Who knows? Advancing your skillset may lead to an even bigger bonus next year.”