Got a Bonus? Save Half!

Save Half your Bonus in your 401(k) - 3 Big Benefits

Today I share the best way to celebrate and enjoy the blessings of your bonus: Save half!

Or as they say, “When times are good, put some hay in the barn.”

Full Transcript of video

Hello, I’m Josh Duncan with SCB News bringing you this edition of Financial Freedom. The purpose of Financial Freedom is to provide tips to help you achieve financial freedom for personal significance.

Celebrate and enjoy the blessings of your bonus.

We are coming up on the time of year when many companies pay out their annual bonus. This can be an exciting time for many families as they may enjoy a vacation, update their home or purchase a new toy. It’s important to celebrate and enjoy these blessings. Especially after all the hard work and sacrifice invested to help make your company profitable.

“Don’t spend it before you get it.”

As with all money, if there is not a plan for your bonus, it can quickly disappear without a trace. I can remember receiving one of my first bonuses when working in the corporate world and not having a clue where I spent the money. I was secretly embarrassed and used my next bonus toward my MBA.

When I worked at Caterpillar, I had a manager who taught me one valuable principle for a bonus. “Don’t spend it before you get it.” he would say. You see, Caterpillar would inform us of the bonus amount about one month prior to paying. I guess there were some employees who would spend the money before it hit their bank account. The bonus was not guaranteed until the deposit was complete.

“When times are good,
put some hay in the barn.”

Another manager shared an additional principle with me. He said, “When times are good, put some hay in the barn.” He was referring to intently saving when your income and bonuses were good. This also refers to the fact that one day times will not be as good, and we should prepare.

As we circle back to the upcoming bonus season, let’s consider one other approach. If you have a retirement savings plan at work, such as a 401k, you may have the option of adding a percentage of your bonus to the plan. This option will have to be made prior to a date defined by your employer.

Save half your bonus in your 401(k) - 3 big benefits!

My suggestion is to consider contributing half of your bonus to your 401k. The first benefit of this approach is saving more for retirement. With the contribution limit for 2020 at $19,500 and $26,000 for those 50 and older, your bonus could help you max out your plan.

Second, this will help reduce your taxable income for the year, if you contribute to the pre-tax portion of your 401k. This could be especially helpful if your bonus will be moving you into the next tax bracket. Why not take more control over your tax bill?

The third benefit is the compounded growth from adding to your 401k investment. Assuming your 401k is invested in a portfolio that produces an average annual return of 7%, your savings will be significantly larger in the future.

If you max out your 401k with a $19,500 contribution this year, in 15 years it would be worth over $53,000! Imagine if adding half your bonus helped you max out your 401k every year? You may be able to achieve financial freedom sooner than you thought.

Enjoy some of the bonus, and put the rest to work for you.

Now, the other half of your bonus can be used for those fun things I mentioned earlier. You may also need to top off your emergency fund or contribute to your child’s 529. I recommend you enjoy some of the bonus and put the rest to work for you.

Make time today to map out your plan for your upcoming bonus. Without a plan, it could evaporate over the next few months. Consider saving half of your bonus in your 401k for benefits now and in the years to come.

Thank you for joining me for Financial Freedom. I'm Josh Duncan, Financial Advisor with F5 Financial Planning, helping you achieve financial freedom for personal significance. Please contact me here to send topics you would like me to cover.  See you next time.

Most recent video blog post:

Retirement! Tax-Deferred vs.Tax-Free