Should I spend my year-end bonus?


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If you were lucky enough to receive a year-end bonus, way to go! It can feel great to get a pat on the back that takes the form of a deposit into your account. An extra deposit begs the question of what to do with the bonus money. You may already be fantasizing about all the fabulous things you could buy with that money. But you might also consider using a year-end bonus to help you get closer to your financial goals.


Smart bonus money moves include paying down debt, funding a short-term savings goal (such as a down payment on a home or setting up an emergency fund), as well as investing the money for long-term growth.


There’s no one formula for spending (or not spending) a bonus since everyone’s financial situation and future goals are unique. Here are some ideas for using that year-end check—or any sudden infusion of cash—that can help improve your financial well-being both now and down the line.


Related: What is a safe investment?

Allocating some money to fun

You worked hard all year, so it’s understandable if you want to put some of your bonus money toward a few wants and not just needs. As with any financial decision, it doesn’t have to be all or nothing. Taking a balanced approach to your money might help you maintain the stamina that financial goals often require.


Although the exact split is ultimately up to you, to avoid overspending, you might want to consider putting roughly 90% of your bonus towards your financial goals, and devoting about 10% to “fun money.” If you’re getting a $5,000 bonus (after taxes), for example, that means you would have $500 to spend treating yourself. The other $4,500 would then go towards putting a big dent in your money goals.

Chipping away at debt

If you have debt—whether from a student loan, car loan or credit card debt—a bonus can be a great way to start whittling away at whatever balance you have to contend with, or even wiping it out completely. Doing this can help you avoid throwing more money away just on interest charges, and if you manage to wipe out that debt, you’ll have one less financial responsibility to stress about every month.


How much of your recent influx of cash should be directed toward debt reduction is entirely personal and will depend on your situation. Some financial planners recommend that people with high-interest debt consider putting around half of their annual bonuses toward paying down that debt.


Credit card debt typically costs the most in interest. Many charge more than 16% interest. So if your goal is to ultimately build wealth, it may be smart to minimize credit card balances or, even better, pay them off completely. It would be unreasonable to expect that you could out-invest what you are bleeding out in credit card interest. The same idea goes for any high-interest or emotionally stressful debt on your balance sheet.

Saving for a short-term goal

If you don’t have an emergency savings fund, getting a bonus is a great time to beef up that financial cushion.


While many people don’t like to think about the possibility of their car breaking down, a medical emergency, or job loss, should one of these unexpected events occur, it could quickly put you in a difficult financial situation. Without backup, you can risk landing in debt should you experience a financial setback.


How much to sock away for a rainy day is highly personal. But a common rule of thumb is to create an emergency fund that has enough money to cover three to six months of living expenses. You may need more or less, depending on your situation.


If you already have a decent cushion, you may next want to think about what large purchases you are hoping to make in the not-too-distant future, say less than five years. This could be a down payment on a home, a renovation project, taking a special family vacation, buying a new car or any financial step that requires a large infusion of cash. Then consider using at least some of your bonus check to jump-start these savings goals, or add to previously established ones.


It’s a good idea to put money you are saving for a short-term goal (whether it’s a down payment or an emergency fund) in an account that is safe, earns interest and will allow you to access it when you need it. Some options include a savings account at a bank, an online savings account, a cash management account or a certificate of deposit (CD). Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period.

Invest for the future

Bonus money can also help you start investing in longer-term goals, such as retirement or paying for a child’s education. Using bonus money to buy investments can help you create additional wealth over time. For example, a lump sum of cash can work wonders in boosting your retirement savings. Even if you’re technically on track for retirement, adding more money to your IRA or 401(k) today can leave you with a larger income stream when you’re older. If you’re already contributing to these accounts, be aware of the annual limits.


You can contribute to your retirement using your bonus in a couple of ways. Many companies will automatically deduct from your bonus for your 401(k) at the same rate as usual. You can also ask your company in advance if you can have a special withholding for your bonus. You may be able to fill out a form (or go onto the company portal) to designate up to 100% of your bonus to your 401(k).


If you can’t direct that money to your 401(k), and you’re eligible for an IRA, consider maxing that out instead. Either one can help get you closer to a great retirement–and may also help you save significantly on taxes in the short term.


People who have kids may want to consider putting some bonus money toward starting, or adding to, a college savings account, such as a 529 plan (which in some states can offer tax benefits).


For financial goals outside of retirement, you may want to look into opening a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but is much more flexible in terms of when the money can be accessed.


How much of your bonus you should put toward long-term investments is an individual decision that will depend on your current financial circumstances.

The takeaway

No matter the size of your hard-earned bonus, it’s a good idea to think about how it can best serve you and your goals in both the short and long term. Otherwise, you might end up spending it here and there with nothing major to show for it.


Some smart ways to use bonus money include getting ahead of high-interest debt, setting up or enlarging your emergency fund, saving up for a large purchase (such as a home), as well as beefing up retirement savings and other long-term investments.


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Gifting money to your kids for college tuition


Fall means freshly sharpened pencils and the sound of thousands of parents sighing as first-semester college tuition bills hit their mailboxes. While many parents want to help their children pay for their college tuition, there is some confusion about whether gifting money to children to use for tuition bills is better than paying the school directly.


With the costs of tuition rising every year, it can be important to make sure that you’re making smart financial decisions when it comes to your child’s tuition, whether you’re paying just part of the bill or footing the whole thing. Under IRS rules, there are different tax implications whether you’re gifting money to kids vs paying tuition. (More on that in the next section.)


Depending on your personal circumstances, making the wrong choice could end up costing you in extra taxes, or in a potential reduction to your child’s need-based financial aid.


While we always recommend you speak to a credentialed financial or tax professional about taxes and any other important financial matters, read on to get a high-level overview of some of the basics around this topic.


Related: Colleges That Offer Free Tuition



marchmeena29 / istockphoto


According to the IRS , the gift tax is “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.”


That’s a lot of words to essentially mean that if you give someone a gift of property, including money, without getting something of equal value in return, that may be considered a gift. And if you’re gifting, it might be subject to the gift tax. In general, the gifter is responsible for paying the gift tax costs.


Now, before you start worrying if you’ll have to pay a gift tax on the $100 bill you slipped into your niece’s graduation card, it is important to know that the gift tax generally only affects large gifts.


This is because there is an “annual exclusion” for the gift tax, which means that gifts up to a certain amount are not subject to the gift tax. For 2019, the annual exclusion is $15,000  . For spouses, the annual exclusion is $30,000.


The tax code, however, currently contains an educational exemption  that may protect tuition paid directly to the school from being subject to the gift tax.

This means it is important to consider all your options and your personal circumstances when deciding whether to gift tuition money or to pay tuition costs directly.


Again, this is simply a broad overview of some of the current guidelines—absolutely speak with a tax professional before making any important financial decisions or if you have any questions about gifting and taxes.




Children are not treated differently when it comes to the gift tax, which means that whether you’re gifting your neighbor money for being really great all those years, or transferring to Junior the $20K you saved up to pay for his sophomore year at a liberal arts school, the gifts are treated the same by the tax code.


This means that a gift you make to your child for the purpose of paying tuition or covering educational expenses may be subject to the gift tax if the gift exceeds $15,000 if you’re single or $30,000 if you’re married and making a joint gift.


With the rising costs of higher education, it is completely conceivable that you’re forking over more than $15,000 or even $30,000 per year in tuition costs. As a result, you might end up on the hook for paying a gift tax on any gifted amount that exceeds the $15,000 or $30,000 exemption.


Elkhophoto/ istockphoto


Another common option when it comes to paying tuition is to pay the school directly. Paying the school directly may help you avoid paying a gift tax on top of the cost of tuition.


Why doesn’t paying tuition directly count as a gift for the purposes of the gift tax? Thanks to a handy carve-out in the tax code, the gift tax explicitly does not typically apply when it comes to tuition or medical expenses  that you pay for someone else.


This means that in some cases, it may save you some cash to pay the school directly rather than first giving the money to your child and having them use it for tuition. It is important to consider all your options, however, as gift tuition payments may impact the student’s need-based aid.


This is more likely when the gifter is a grandparent or other individual, however, as financial aid determinations often already take both student and parents incomes into account. Consider using an online calculator  to get an idea of how different scenarios may affect your child’s federal aid award amounts.




While many parents help with college costs, you may also have other competing priorities, like retirement. If you’re looking for other ways to help cover your student’s educational costs, and your child has already exhausted their federal aid options, you could consider federal parent loans or private parent loans.


One type of federal loan available to some parents is the Parent PLUS Loan, which is a type of federal student loan that may be available to parents with kids enrolled at least part-time in an eligible program. These loans are not subsidized and accrue interest while your child is in school.


If a Parent PLUS loan and other types of financial aid are not sufficient to cover the cost of your child’s education, private student loans could be an option. Private student loans are offered by private financial institutions, not the government.




While private student loans aren’t right for everyone, they could allow your student to borrow money to fill the gap in funding for their college tuition if federal aid isn’t enough.


Unlike federal student loans, the terms of private student loans are set by the lenders. This means that private student loans might not have a fixed interest rate, and the lenders might look at things like your credit history and other financial information to decide if you qualify.


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