Help me financial wizards! What to do with bonus.
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Anonymous
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In the next few days I will be receiving a bonus of 30K (so about 20K after taxes). I need help deciding what to do with it, as I am not particularly financially savvy. The possibilities:
- Use it to pay off my student loans. I currently owe $14,300 at 3.6% interest. I also owe a small loan (about 1K) at 2%, but not planning to pay that off. Payment on big chunk is $550 a month. - Use it to pay off car loan. We currently owe $17,300 at 3.76% interest. Payment is $430 a month. - Keep it as cash emergency fund. We currently have only about 15K, which assuming we lost the higher paying job, and immediately got rid of childcare expenses, would keep us afloat for about 3 mos, assuming serious cutback and deferring student loans. So not enough. That said, odds of job loss for either of us in next couple years are very low, and I think we should get a tax refund shortly that will let us dump in another 10K. - Put it in a stock index fund (the lowest fee Vanguard was my thought). We currently have no investments outside of work 401Ks, which we max. - Put it in 529s. We currently don't have 529s for our 3 young children. For various reasons this is not a super high priority for us, but the tax savings might make it worthwhile. However, I'm not clear if we will get tax saving - could any deduction get taken away by the Alt min tax? We bounce back and forth between paying and not paying Alt min, and I'm not sure what makes the difference. Last year I think our tax rate ended up being 28%. We have self-managed rental property, so I think that helps. I figure we'd have to ask our accountant if contributing to the 529 could make a serious dent in our taxes. But also, I'm reluctant to tie up cash in a way that is not liquid, and won't get rid of any monthly payments. - Use it on home improvement. Our porch is practically falling down, and connects to a badly done addition. We could use the 20K plus maybe a HELOC to renovate. Not a necessity by any means but would improve our quality of life a lot, plus is long term likely a good investment -- property values in our neighborhood have risen substantially since we bought, and our home is considered very desirable. That said, we plan for this to be our forever home, so not like we plan to flip the house and make a profit. - Something else I'm not thinking of? Put it toward our mortgage (4.25% interest?)? Use it to improve our rental properties? Even if we improved them, we wouldn't raise the rent on our current tenants. Very grateful for any advice. |
Anonymous
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Congrats on your bonus. There's no immediate tax savings for contributing to a 529 at the Federal level.
I'd probably pay off the higher interest car loan and put the balance to savings. |
Anonymous
| What I would do: Pay off the student loan. Put the rest in your emergency fund. Use the increased cash flow to pay off auto loan quicker. |
Anonymous
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I'd put 100% of it towards debt. I'd first pay off the student loan then put the remainder towards the car and double up on car payments. Increasing your cash flow helps in the long run if you do lose a job, you have less mandatory monthly expenses. If you don't lose a job, you can then more quickly build your cash reserves until they get to a more comfortable level.
Work towards being able to live off one income and then you will be able to use your cash surplus for investing and building wealth, not just living. Right now the only thing you have growing is your 401k, thats great, but wont exactly lead to financial freedom (if that's what you even desire). |
Anonymous
| Your take-home bonus will probably be closer to $15k. You'll get it back when you do your taxes, but bonuses are initially taxed at a higher rate. You can't just use your marginal tax rate. |
Anonymous
PP is right. I just got a $10,000 bonus but by the time the IRS was done savaging it was hair above $5,000. OP - bonuses are taxed at a 25% rate below $1,000,000 and then the various other taxes are taken out - feds, SS, medicare, DC govt. |
Anonymous
+1. If you're subject to AMT but still have a car loan, you could be spending less. I wouldn't consider renovating. |
Anonymous
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In your case, car loan, then the rest in emergency fund.
Bigger question: what is your hhi, age and what do you have saved for retirement? $15k is probably less than 9 months of living expenses. I would pay off car loan, then student loan, then 9 months expenses, then retirement maxing (or at least 10%), then 529, then extra in stock market low cost index funds. |
Anonymous
Well, yeah...that would be living on $1600/mo. I'd be able to live 2 months TOPS on 15K and that would be without health insurance. |
Anonymous
| Thank you to all who responded. The car loan is around partly due to bad luck. We moved to a LOC area, but that required purchasing a second car. Then a month before the move, another driver fell asleep and hit our car, totaling it. It was an old but very reliable car, so the amount we got from insurance was not anywhere close to replacement cost. So right as we were putting all of our cash down for a down-payment, we also had to suddenly purchase two cars. We only had enough to purchase one in cash. We definitely spend too much and we're working on that, but the car loan thing has a little bit of bad luck thrown in. HHI this year is 275K (that's both salaries combined). Age 35, and I think we have about 60K saved for retirement, which is way behind where I'd like to be, but we haven't earned this much very long, and student loans (my husband owes a lot more) and childcare for 3 kids are fairly crushing. Part of our retirement strategy is rental income from the properties we own (which now break even on mortgage + expenses). We are trying to be more responsible though - certainly don't feel poor, but should probably act like it. It sounds like the consensus is to pay off the car loan (or try! didn't realize 50% of bonus would get eaten up by taxes) and put any extra into emergency fund or the student loans. Thank you very much for the advice! |
Anonymous
Do this, not the car loan. The car loan is a (very slightly) higher interest rate, but the SL will free up more money per month. Use that $550 to beef up your EF and pay down your auto loan. |
Anonymous
| I would invest it in a low fee mutual fund. Your loan rates are not that bad and you will probably make out with a better return if you invest it. I do say probably because there is always risk but you asked me what I would do and I gave you my answer. |
Anonymous
| No IRAs? |
Anonymous
This. |
Anonymous
Bad advice. They need to free themselves of some of this debt so they can increase their free cash flow. |