Did you end the year with a big bonus? Can you count on a raise in the new year? Well, pop a champagne cork and get out your checkbook. My address is . . .
Just kidding. Getting a bonus or a raise can be a great time to celebrate, not to mention a great opportunity to bulk up your savings. It can also be a great time to engineer a plan that will let you make faster headway toward some other financial goal.
If you didn't blow your whole bonus on holiday gifts, here are some ideas for putting your extra salary to work for you throughout 2007. Focus on one goal, or combine them to make progress across the board. Then, get back to work so you can see your earning power rise next year, too.
- Use your bonus to start or increase your emergency fund. This could be one of the easiest paths available to more restful nights. You don't even have to scrimp for more savings out of every paycheck. If you don't have an emergency fund, then this should be the first option you consider. Money in the bank, available in case of a job loss or major disaster, will serve you well in the future. In the meantime, look around for the best place to put that little nest egg, namely in an account that will earn a decent interest rate but still be readily available -- just in case that emergency strikes. Our Savings Center has plenty of information on why and how to establish an emergency account.
- Bank your raise in your 401(k). You've lived without the money this far, so why not contribute that annual raise to your future, retired self? If you've been struggling to save enough for your retirement, this can be a painless way to boost your coffers. If you haven't been contributing enough to your workplace retirement account to fully take advantage of your employer's match, then banking your raise in your 401(k) should be at the top of your list.
- Plunk your bonus or divert your raise into an IRA. That's another easy way to save for retirement without changing your lifestyle one iota. You have until April 16 (or April 17, depending on where you live) to make deposits to an IRA for 2006. Then you can get started on 2007. For both years, you can deposit up to $4,000, or up to $5,000 if you're age 50 or older. To learn about all things IRA, click around our IRA Center.
- Pay off some debt. This may be the least gratifying option in the short run, but a really profitable idea in the long run. If you're carrying high-interest credit card debt, a bonus can make real headway toward finally getting out of that hole. Likewise, diverting your raise straight to your credit card payments can accelerate that date when you finally pop a champagne cork to celebrate your new freedom from debt. You might even consider using a bonus or raise to get rid of other debt, like car loans or home equity loans. From a mathematical standpoint, it may not be the most profitable way to use the money. But the extra funds you'll have every month with that debt out of the way will feel like a raise. Our Credit Center has some great tips and articles about getting rid of serious debt.
- Open an investment account. If this is something you've always wanted to do, but you never found the spare cash lying around, now's your big moment. Open a brokerage account and start putting your research wheels in motion. You might be interested in a recent article describing the market's 10 best stocks over the past decade. I was surprised to learn that they tend to be smaller companies, not the biggest household names. For example, two apparel retailers -- Chico's
(NYSE:CHS)and American Eagle (NASDAQ:AEOS)-- made the list. On the other hand, who doesn't recognize electronics retailer Best Buy (NYSE:BBY), another top performer? Its good evidence that a little digging can produce a strong and productive portfolio.
- Start a home fund. Saving to put a down payment on a house can seem like a long and tedious process, particularly when you're daydreaming about planting daisies and building white picket fences. Make your dream come true by diverting your extra money into a down payment fund. Even if your goal for homeownership is a little more distant, it can't hurt to start early.
After you've considered all those options, think about spending a little of that bonus or raise on yourself. After all, you worked hard all last year to earn it. Just figure out how to balance your future goals with your desire for fun.
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- The Real Retirement Secret
- Fool Yourself -- Into Saving More
- Save More Now, Play Much More Later
Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article, and she welcomes your feedback. American Eagle and Best Buy are Motley Fool Stock Advisor recommendations. The Fool's disclosure policy exceeds expectations.