How often do you receive a year-end bonus and immediately begin making a list of how you will allocate it?
This plan usually includes one of four uses:
- Spend it
- Give it
- Payoff debt with it
- Save/Invest it
Each of these options can improve your life in the right circumstances. But today we’re digging in to the one that helps your bonus become a gift that keeps on giving.
Assuming you are squared away with short-term savings and high-interest debt, there’s several decisions to be made on how best to save your bonus.
- Which account is best to save in?
- If not a bank account, when’s the best time to invest the money in the markets?
Choosing the best account will depend on evaluating your tax bracket, spending needs in the short and long-term, and future earning potential.
Deciding on the place and timing is more emotional. When sudden money is received, people generally hem and haw between investing now or waiting until things look better. This is because fear of potentially losing money now is much stronger than likely making money over time. I’m always perplexed when I hear the “waiting until things look better” response. Because this implies that people will follow through and actually invest after the market has fallen by 20%, 30% or 50%. After all, this IS when things look better with market prices. But what are the chances, it will FEEL better to invest at that point? Most are more terrified of losing more of their money vs. the prospect of incredible returns in moments like that.
In today’s show, we discuss a recent study from Vanguard describing numbers to back up which strategy is better to implement with a lump sum: invest it all now or invest small amounts over time.
This post was motivated by an article Chad was quoted in on the best and worst ways to spend your year-end bonus linked below.
- Investing a Lump Sum vs. Dollar Cost Averaging
- How a bonus can be the gift that keeps on giving
- Unconventional ways to spend a year end bonus
Facts and Links Mentioned In the Show
- Invest now or temporarily hold your cash? [Vanguard Financial Planning Perspectives]
- 3/4 of employers plan to give year-end bonuses this year. [Journal of Accounting Principles]
- Best and Worst Ways to Spend Your Year End Bonus [GoBankingRates.com by Cameron Huddleston]
- Investing a Lump Sum at All-Time Highs [A Wealth Of Common Sense]
- The Importance of Financial Planning [Episode 6 of Financial Symmetry Podcast]
- Investing in Yourself – Human Capital [Nerds Eye View by Michael Kitces]
- Photo Credit [photosteve101]
- Listen to Chad on the Stacking Benjamins Podcast