Making the Most of a Financial Windfall

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.

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.