Five Ways to Make the Most of a Bonus, Raise or Tax Refund
Windfalls happen, thankfully, so have a plan and yours won’t be wasted
It’s hard to make the most of a sudden jolt of extra cash showing up in your checking account. Before you know it, it’s spent. Later, you’re left to wonder how that sum might’ve helped build your financial security.
Here’s how to capitalize on good fortune:
Give yourself some to spend. On whatever. Just like a diet, if you completely deny yourself some indulgence, it can be hard to stick with a plan. You will likely find it easier to stay committed to saving and investing if you also give yourself permission to spend some of it. Maybe 10% of the haul? Or 20%?
A raise – an ongoing income boost – needs its own strategy. Challenge yourself to save or invest at least 50% of it. For instance, if you get a 4% raise, vow to put at least 2% toward a financial goal. (Hint: If you’re not yet saving at least 10% of your salary for retirement, ping HR and have your contribution rate to your workplace retirement plan raised.)
Tackle credit card debt ASAP. Given the absurdly high interest rate that credit cards charge, using extra cash to pay down that debt will be a valuable return on your money. Let’s say you pay 16% interest on a credit card balance. There is no guaranteed investment out there that will pay you 16% immediately. But if you use your extra cash to pay down or pay off that credit card, you’re essentially giving yourself a 16% return.
Build up your emergency savings. C’mon, we’re agreed that life happens, right? Having cash to handle the unexpected is a huge stress reducer today that can be a financial lifesaver down the line. If you run into an unexpected expense – medical bills, a layoff – having cash handy means you won’t need to rely on credit card debt or raid retirement savings. (Tip: Online savings banks typically offer the highest interest rates on savings accounts.)
Save for a down payment/make an extra mortgage payment. You can land a mortgage with a down payment as low as 3% to 3.5%. The average federal tax refund is around $3,000. That could be a major jumpstart to a down payment stash for renters who want to own. For homeowners, getting in the habit of using extra cash to pay extra on your mortgage will reduce your payback period and potentially save you boatloads in interest. Free online calculators will show you how adding a set amount each month, or once a year, will reduce your total mortgage costs. (Tip: Whenever you send in extra payments, make sure your loan servicer applies 100% of the extra to your loan principal. You don’t want a penny going to paying interest.)
Invest in your career. Step back for a sec and decide where you’d like to see your career go next. Maybe what’s next requires a new skill or two. Or you really need to up your networking. Taking a course, joining a professional association or perhaps hiring a career coach to help you sort out your next steps mean you’re investing in your future.
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