Readers of Centsible Life often have questions. Since I’m in the business of helping you better your finances (and life!) I’m sharing reader questions each week.
Recently a reader (name withheld) emailed me to ask about what to do with an extra $5,000 she would receive as a bonus from work.
Q: “What should I do with $5,000?”
A: First of all, congrats on the extra dough! It’s not everyday an extra $5,000 lands in your lap, so take a minute and appreciate it.
Done? Okay, now let’s talk dollars and cents.
If this is a bonus from work it may mean you are receiving $5,000 gross income versus $5,000 in cash. Remember those fun guys FICA and Social Security? Yep, they get their cut, too. Depending on your income and allowances this will look slightly different for everyone.
Let’s assume you’re on the average-so you’re looking at about $3,500-$4,000 after taxes on a $5,000 bonus.
Now onto the important stuff. What should you do with your bonus?
3 Ways To Use $5,000
There are probably 5,000 ways to use your money, but without knowing all your personal details these three ways to use $5,000 are a good place to start.
Before you decide there are two things you should consider. If you tithe or give a percentage of your income to charity, consider donating 10%. That would be roughly $350-400. Then take 10% and do something fun. One of the best ways to feel fulfilled financially is to allow yourself some freedom to spend when you reach milestones or have extra funds.
1.Put it in savings.
Everyone can use more accessible savings. Consider socking it away in your emergency fund. If your emergency fund is fully stocked, consider adding it to your other savings goals such as your car downpayment, house downpayment, or vacation fund. If all those are covered or you have high-interest debt keep reading.
2. Use it to pay down high-interest debt.
High-interest debt is expensive. Use every penny to pay down any high-interest debt or credit cards. If you have low interest debt like student loans or a mortgage you may consider making an extra payment to them to help reduce your overall debt. Or if you’re in the position of only owing a few thousand on a debt (say your student loans) take that bonus and pay it off. It will offer you more financial freedom.
3. Sock it away for retirement.
If your emergency fund is fully stocked, you have no high-interest debt, and you’re comfortable consider socking it away in a retirement fund. Add it to an IRA, increase your 401k savings (and keep the funds to pay off regular monthly bills), or sock it away in stocks, bonds, or your HSA account.
What suggestions do you have for an extra 5k? Would you blow it all on a vacation? Save for the kids’ college? Or would you do a combination of things?