Money Moves to make now. Almost 25% of companies are offering an end of year employee bonus based on company performance. During a tight labor market, bonuses tend to go up which is great news for you.
While it might be tempting to blow the bonus on a vacation or a new car we recommend you make the most of your bonus in 3 simple steps – Save, Spend and Invest.
Save. If we’ve learned anything from the pandemic it’s that things can and do happen. Allocate some of your bonus to building up your emergency fund to cover unexpected events such as a sudden job loss or a big medical bill, which can eat into savings fast. Most experts recommend keeping three to six months’ worth of expenses in an emergency fund.
Spend. It’s important to first pay down on any debt including credit cards or student loans. This will reduce interest you are paying each month and will free up more cash to save or invest.
Then, treat yourself! Think of something you’ve wanted for some time but never quite had the spare funds to do. It could be purchasing exercise equipment to keep fit or a spa day to pamper yourself.
Also, even a small donation to a non-profit can make a big difference to people in need and it may be tax deductible.
Invest. The easiest way to invest is to enroll in your company 401(k) plan. Not only does this reduce your taxable income it helps build retirement savings. At a minimum you should contribute enough that you get the employer match. Otherwise you are just passing on free money.
Don't have a 401(k)? Open an IRA
You may be self-employed or maybe your employer doesn't offer a 401(k). But you can save in a tax-advantaged account like an IRA which we'll cover in the next issue of Money Moves.
If you think you can rely on social security to cover retirement expenses then think again. According to the AARP the estimated average social security benefit in 2021 is $1,543 a month. The maximum benefit a retiree can get is $3,148 for someone who files for social security in 2021 at full retirement age.
You need a plan for how to cover the difference in your monthly expenses. Fidelity Investments has a simple rule of thumb to determine how much you need to save.
Accordingly to Fidelity you should aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. That 10x goal may seem ambitious. But you have many years and many different ways to get there. What if you're behind? If you're under age 40, the simple answer is to save more and create an investment strategy based on the age you plan to retire.
Putting just 1% more into a tax-advantaged retirement account like a 401(k), 403(b), or an IRA could make a noticeable difference in your lifestyle in retirement.
This article is part of our Money Moves series; advice for all things career and money.
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