Bonus Time is Upon Us
The turkey is digested, Cyber Monday is blowing up your inbox. It's time to start anticipating that potential glorious excess cash flow that happens at the end of the year: your bonus.
For the last 6 years, bonus time was important to me for one reason alone: it meant I could pay off a big chunk of my student loans. Slashing $8,000 in one month meant less interest, a smaller overall balance, and frankly light at the end of the tunnel. With a $225,000 starting balance in 2013, and a $0 balance at the end of 2019, paying off loans as quickly as possible was like a drug - any extra money went to paying down that stubborn debt. Was there a balance I was missing? Is there a safe place between enjoying the fruits of your labor and doing adult things like paying off debt? I think so.
Let me talk through some scenarios with you.
I'm not getting a bonus this year. 2020 sucks. It's hard not to blame someone, anyone, for how 2020 has felt. Despite aid efforts from the government, small businesses are closing, companies are laying people off, and bonuses might seem like a distant memory. It's unlikely any new stimulus will be approved this year. But let's think positively. What can you do in a bad year to help boost or bolster your future? Look at the spending side. Take a fresh inventory of what debt you have outstanding. I'm not kidding - pull your transactions from all of your credit cards or bank accounts and categorize them. Maybe you haven't spent as much time in restaurants this year, but has your online shopping tipped the scales? I've said it before and I'll say it again - awareness is the best first step. We are all hoping and praying that 2021 will be better, but it doesn't mean you should ignore your finances in 2020. Why not end the year with a firm understanding of where you are, so that you can burst into 2021 with a plan?
I'm getting a standard bonus, it's ok, not a banner year. Congratulations, your 2020 is ending on a positive note! Do you typically use all of your bonus on holiday shopping? Do you book a trip? Or are you like I was, you use 100% of your bonus on student debt? My suggestion with a "just ok" bonus is to remove the things that are pulling you down from a financial perspective. If that's credit card debt, pay it off and make a plan to avoid this holding this kind of debt going forward. Treat credit cards as a monthly revolving credit line (as they are intended), and try to pay in full each month in 2021. If you have student loans and want to use your bonus to pay them down, consider which individual loan will give you the largest benefit - that typically means the highest interest rate. If you have refinanced your student loans this year, or if you are working toward loan forgiveness of any kind, then you should weigh the benefit of paying your principal down vs. other family needs. Is there other debt outstanding with worse terms than your student loans? Have you looked at refinancing your home this year? The primary downsides of refinancing a home are the paperwork and the cost to refinance, which range from $4,000 to $10,000. We can all get past the paperwork, but maybe your 2020 bonus can pay the refinancing costs so that you don't have to wrap that fee into your new mortgage. Bottom line: most of us have some sort of debt holding us back - use your bonus to alleviate some of the stress that causes.
I am getting the largest bonus of my life, but I have student loans. Can I enjoy it? Oh hello, friend. You have won the 2020 holy grail. An unexpected, very positive cash flow at the end of a crappy year. When you get news like this, whether in 2020 or any year, you need to celebrate it. DID YOU HEAR THAT? You need to celebrate it! Mark the occasion, because you've worked really hard this year, and more likely many years to deserve a big bonus. Am I asking you to blow your entire bonus on a pony or a trip to Vegas? Of course not. It's still important to prioritize the financial aspects of your life that bring you down. I believe this because the positive feelings you get from being debt free are real people. I've experienced them first-hand. What I'm also saying is that if you can pay your debts completely, or down significantly, take yourself and someone special (safely) to dinner. Bookmark part of your bonus for a trip whenever you feel comfortable traveling again. If you focus too much on building your future, you might miss some wonderful experiences today.
Is my thought process becoming clear? The highest priorities in creating a financially successful future are controlling spending and prioritizing debt so that they don't begin to control you. Full stop. Read that again.
My next suggestion to is to check into your retirement savings. I didn't mention that in the bonus walk-throughs above because I hope you've already set that up and have made that a priority before bonus time. Short and simple version? Max out your retirement plan options at work first. If you can't fathom doing that any time soon, then increase your savings by 1% of your paycheck each year until you reach that max. If you are saving 3% of your paycheck now, save 4% next year, etc. As you get raises, you won't notice the 1% increase, and before you know it, you will hit that max.
Final priority - celebrate your wins. To me that's as important as controlling your spending, paying down your debt, and saving for your future. If you put your head down and focus too much on your numbers and some obscure version of future you, you will miss out on the experiences that create a rich life.
Fair enough? Schedule some time with me here to talk further.