Got a holiday bonus coming? That's fantastic news -- but there's no need to settle for however much your boss is giving you. Why not take that bonus and make it grow? If you get a $2,000 bonus and use it for one of the below purposes, you can increase its value by $236.80 to $736.80 within a year -- and that's just based on average results.
Pay off debt
Credit card debt is incredibly expensive. As of September 2017, the average credit card interest rate has risen to 16.15%, despite low overall interest rates. So if you're stuck with a bunch of credit card debt you can't get rid of, you're paying through the nose for it – which is where your holiday bonus can really help. Use your bonus to pay off $2,000 worth of credit card debt that would have been charged 16.15% interest compounded monthly, and you'll save around $348 in interest over the next 12 months.
Using your bonus to pick up some extra stocks or bonds for your portfolio can put your money to work in a major way. After all, large-cap stocks have an average long-term annual return of around 10%; put your $2,000 bonus into such stocks, and you'll turn it into $2,200 by the end of the year, assuming an average performance. If you choose stocks that pay dividends, you can make even more than that; the average dividend yield on the S&P 500 right now is around 1.84%, so add another $36.80 in dividends to your total.
Make an extra retirement contribution
You can take the idea of investing your bonus a step further by contributing it to your 401(k) or IRA. By sheltering your bonus investments inside such an account, you can avoid capital gains taxes as well as taxes on the dividends and interest that come into the account, and enjoy an immediate benefit in the form of a tax deduction. So not only would you get the approximately $236.80 in returns and dividends from your investments the first year, but you'd also get a $2,000 tax deduction. If you're in the 25% tax bracket, that means your deduction could save you $500 in taxes, bringing your total returns for the first year to $736.80.
Stick it in your HSA
If you think the tax benefits of an IRA are nice, wait till you hear about health savings accounts. HSAs are the only account to provide a triple tax advantage: you get a tax deduction for your contributions to the account, you don't accrue taxes for capital gains, dividends, or interest on the assets inside the account, and your distributions from the account are also completely tax-free (assuming that you use them on qualified medical expenses). If you save more in your HSA then you end up spending on healthcare costs, don't fret – once you turn 65 you can spend the money in your HSA on anything, tax-free. So not only can you potentially get the same $736.80 in returns the first year that you'd get for putting the money in your IRA, but you can also turn around and spend that money any time you please.
Consider long-term returns as well
Note that all of the above returns are just what you'd get back in one year from using your bonus for these purposes; the long-term benefits can be far more impressive. Take the retirement contribution example: over the next 20 years at an 8% annual return, that $2,000 would turn into $9,322 – after 30 years, it would become $20,125. How does making your bonus over 10 times bigger sound? And if you put that same $2,000 bonus in your retirement account every year for the next 30 years, you'd have $264,817 in retirement savings from those contributions alone. Now that's a nice bonus for all your hard work.
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