Whether it’s tied to performance, holiday profits or a tax refund, nothing beats the joy of receiving a bonus. But resist the temptation to blow it all on something that could be short-lived. Instead, consider the following, all of which can have a lasting impact.
- Pay down debt. If you’re carrying a credit card balance or another high-interest, short-term debt, here’s a chance to reduce it. With average credit card debt at nearly $8,000 per household, even a modest holiday bonus can make a serious dent and minimize the snowball effect.
- Refresh your emergency fund. Are you one of the 63 percent of Americans who doesn’t have the savings to cover an unexpected $500 expense? Consider building a cash cushion that will help prevent you from reaching for your credit card at the next emergency.
- Superfund your retirement savings. Take this opportunity to max out your IRA or 401(k). Using a bonus to put more long-term money into tax-advantaged accounts lets you avoid the end-of-year funding rush.
- Leap ahead a few payments. Overpaying your usual mortgage amount means you’re shaving down the principal faster, which results in less interest. You can do the same with student loans and other long-term payments, just make sure there isn’t a prepayment penalty.
- Don’t just treat yourself; invest in yourself. Reserve 10 to 20 percent of your bonus for a home, health or education upgrade. Spending in areas that are likely to generate more money in the future is a smart way to rationalize a purchase since you’re putting the unexpected funds to good use.
Consider dividing your bonus among multiple categories, giving higher percentages to your more urgent priorities. Using this strategy for a lump-sum windfall can turbocharge your existing short-term and long-term financial goals while still giving you a little breathing room to enjoy your reward.
If you’re like most of our clients, you’ve thought long and hard about the financial aspects of your retirement. You’ve likely worked hard and saved diligently. But, retirement for each person is different. Perhaps you plan on a working retirement with a new job and less stress, focused on what you love. Or, perhaps you plan to travel, play golf, or just rock on the porch. Or, maybe you want to downsize to a smaller house, spend time with the grand-kids, or take up sky diving. Who knows? Whatever the plan, don’t forget to consider the location you plan to call home.
Where you “officially” call home can make a difference in your retirement lifestyle. Even if you plan to travel or live out of your RV, the place you officially live can impact your taxes and other living cost factors. Obviously, most people realize that retiring to California or New York will be generally more expensive than retiring to Tennessee. So, what are some of the factors to consider when picking a retirement destination?
For most retirees, the two largest expenses in retirement will be medical care and taxes. Yes, a milder climate not only means a more enjoyable tennis match, but it can also mean lower utility bills. However, lower utilities are not likely to be as big of a financial factor as other considerations. Regarding medical expenses, BenefitsPRO recently completed an analysis on healthcare costs in the US. Now, keep in mind that the analysis merely compares Medicare premiums, but this can still be a fair comparison on what average medical costs by state may be because Medicare premiums consider medical costs as a major factor. Believe it or not, the cost to have a heart attack is different in different parts of the country. So, on average, Florida has the highest Medicare premiums running 35% more than Hawaii, which has the lowest. This makes sense from a supply and demand standpoint; there are many more retirees in Florida needing medical care, which likely means there are consistent strains on supply, which in turn drives up the cost. Tennessee did not make the top ten lowest or highest for Medicare premiums.
Taxes are the other major factor for most retirees. Kiplinger recently listed six factors to consider when picking a retirement destination and each of the six factors were different types of taxes. Most retirees consider income taxes and while income taxes can be a major factor for some retirees, Sales Tax, Property Tax, and Estate Tax can be even more important. This is because once you reach retirement, you may have already earned most of your income; now it is more a matter of spending it. If income taxes are really your biggest issue, you might actually consider life outside the US. Over half-a-dozen countries actually have no income tax, but keep in mind, you’ll have to give up your US citizenship and other expenses may far outweigh the income tax savings unless your income is significant. Also keep in mind, the IRS will make you pay tax on your IRA before you expatriate, so don’t look to leaving the US as a way to avoid your Required Minimum Distribution (RMD). One income tax you may want to watch out for is income tax on certain investments. For instance, Tennessee has no income tax on earned income; however, it does have income tax on interest income over a certain level. These hidden taxes can sneak up on you and make a difference. Another somewhat hidden income tax is Social Security income tax. Some states have been moving away from taxing SS, but as of this writing, thirteen states still do tax it.
If you are less affluent, then sales taxes and property taxes will likely be more significant factors. When considering property tax, keep in mind that most often this is a function of county government rather than state or federal government. If you own or plan to own significant amounts of real property, moving across the county line could mean a significant difference. Also consider if the county/state allows for a property tax “freeze” for owners who reside in the property. This can ensure that property taxes do not go up for you.
As for sales taxes, this is a function of states and local municipalities, but usually more dependent upon the state’s rate. Again, moving across a state or county line or even out of city limits can be factor. Also be aware that the sales tax rate may vary by item. For instance, some states do not charge sales tax on food or may charge a different rate on certain large purchases.
Finally, there are estate and inheritance taxes. The difference in these two is the way they are calculated. Estate taxes are charged to the estate, but inheritance taxes are charged to the inheritor, which may have differing rates depending upon whether the inheritor is a spouse, child, sibling, or unrelated. And, not only do the rates vary, the exemption amounts (how much you can pass on without having the tax) varies by state. Some states match the federal government’s exemption, but most don’t.
In all determining where to retire is an important consideration for which weather may be a big consideration. Just don’t forget to look at the financial implications of location too. And, if you need help evaluating those consideration, call us at 877-5WEALTH.
The information provided in Eddleman’s Economic Insight is not intended to be used as investment advice; rather it is provided as general economic news and information for your awareness or for discussions with your investment professional. Please consult your investment professional or CPA for advice specific to your situation! Past performance is not indicative of future results.
Depending upon your circumstances and everyone’s is different, the order that you prioritize for investing may vary. However, in general most people should prioritize investing for the short-term and then the long-term. Short-term investing, which I prefer to call savings, is most commonly for an emergency fund. An emergency fund is basically a small accumulation of money to pay insurance deductibles and co-pays plus other small, unbudgeted expenses like a hot water heater replacement or new tires. An emergency fund should also be available as a replacement income during a time of unemployment. Most experts recommend having three to six months of expenses in an emergency fund. For many this may be the same as three to six months of income, but the distinction should be drawn here between income and expenses. To help evaluate how much you might need, look at the job market for your career. What you need to ask yourself is, “How long would it take me to find a replacement position to earn my current income?” Only you can be the judge, but that’s why three to six months is used as a rough guide. Statistically, the higher your income and the more specialized your field, the harder it is to replace your income. Some may want to plan for unemployment lasting more than six months.
Short-term savings may also include putting back extra for large purchases such as a large appliance, automobile, or vacation home. Though you may use similar instruments to help the money grow, be sure to keep this money separate from your emergency money. If you have the discipline to separate it through budgeting, you can use the same accounts, but this is difficult for most people. I recommend keeping separate accounts for your different short-term saving purposes. Obviously, it is difficult to save for your next car if you’re still paying on the old one, so debt elimination may be a factor in getting your short-term savings in place. Most would suggest getting a small emergency fund first, followed by debt elimination other than your home, followed by the rest of your short-term savings accumulation.
The objective of your savings instrument should be to outpace inflation while maintaining relatively stable principle values and high liquidity. We usually recommend a combination of a checking account, money market, and certificate of deposit for our clients. Each of these allows for good principle stability, but with varying degrees of return and liquidity. Having the least necessary in the most liquid investments is often the most advisable, but again only you can be the judge of what you will need access to.
In conclusion, the distinction between saving and investing is important. If you are merely “loaning” money with savings and not investing money, your assets will not truly “grow” in spending power. In fact, if you don’t keep up with inflation, the value of your money can go down even if the amount grows! Inflation is a real risk that should be considered for longer-term investing, so investment vehicles used for savings and investing should differ greatly for most people and businesses.