Did you receive a holiday bonus from your employer last year? If so, maybe it's not the best idea to run out and go on a shopping spree. Start the New Year off right by taking your holiday bonus and doing something for your financial future. Here are three suggestions from our analysts on how to do just that.
Selena Maranjian: Last year, Wall Street bonuses averaged $164,000. Odds are you're not getting a bonus like that this year. Still, a recent survey showed that 78% of employers plan to give out bonuses, though about half of those will be modest gifts or cash awards of $100 or less. Plenty of folks will get a few thousand dollars, though -- which presents a terrific opportunity that shouldn't be squandered.
The smartest way for you to use your bonus depends on your personal situation. Are you debt-free with retirement savings on track to meet your needs? If so, then go ahead and splurge if you want. But if you're saddled with considerable high-interest debt (i.e., credit card debt, not a mortgage), paying that off needs to be a priority. If you owe, say, $20,000, as plenty of people do, and you're being charged 25% in interest, as many people are, then your debt is costing you around $5,000 annually -- a huge amount. If you don't pay it down aggressively, the balance can grow, and you can spiral into an even more dangerous situation.
You might be drooling over a large-screen TV or a trip to some island, but it might help motivate you to pay down debt if you look at it this way: Good investments can compound and grow, making you richer and richer, while high-interest debt can compound, too, making you poorer and poorer. With a 25% interest rate, when you pay off any portion of the debt, you can consider it like you're earning a 25% return -- something very hard to achieve in the stock market or elsewhere. Plus, once you're out of debt, you can start investing for growth, saving for retirement, and buying things you want -- as long as you can afford them.
Leo Sun: Bonuses vary widely, but a study conducted by American Express OPEN found that small businesses gave their employees an average bonus of 15% on their December pay -- a substantial increase from 9% back in 2012.
If your bonus is only a few hundred dollars, it might be tempting to simply blow it on a new outfit or gadget. But here's another idea -- hold on to it and invest it in the stock market. A few hundred dollars might not seem sufficient to buy stocks, but there are several ways to build a portfolio with a minimal investment.
For just $100, you can invest in Schwab Total Stock Market Index (NASDAQMUTFUND:SWTSX) a low-cost index fund that tracks the Dow Jones U.S. Total Stock Market Index -- an index of around 3,600 stocks across multiple sectors. The fund is up around 10% over the past 12 months -- offering a heftier return than the low returns of the average CD. For investors interested in individual stocks, Capital One's (NYSE:COF) Sharebuilder requires no minimum investment and lets investors buy partial shares of "pricey" stocks such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Priceline (NASDAQ:BKNG), which respectively cost over $530 and $1,140 per share.
Minor investments like these can help prospective investors get their feet wet in the stock market without putting too much cash at risk.
Matt Frankel: One of the best things you can do with any extra cash is to start (or build up) an emergency fund. According to a report by the Federal Reserve Board, about half of Americans couldn't cover a $400 emergency expense without borrowing the money or selling something.
Most experts agree that you should have at least six months of expenses set aside, but that could be more than you think. Make sure you include your housing expenses, car expenses, groceries, and all of your recurring bills when planning for emergencies.
A lot of people hear the word "emergency" and assume it refers to extreme, rare events, but in the financial world it can mean any relatively large and unexpected expense.
You could get a flat tire while driving tomorrow. You could get a toothache and need expensive dental work. Or you could accidentally lose your expensive smartphone. None of these are actual "emergencies" -- you probably won't call 911 if you wake up and your tire is flat. However, the point is that these things happen and none of them are expected events. By having an emergency fund, you can make sure you don't have to go into debt or sell something every time you need to come up with a few hundred dollars.