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02/04/2020

Waterfall, Balance, Podium: Three Smart Ways to Handle Your Bonus

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You had a great year. You hit or exceeded your targets. Or the company had a great year. You’re getting a bonus. Pat yourself on the back.

How can you make the most out of your bonus and feel like you have something to show for it? How can you reward yourself both now and long term?

The answer to those questions has two parts.

First, have a plan before the bonus arrives.

Second, remember the number three. It’s going to be important in several ways.

Three Goals and Three Steps

First choose your top three goals: paying down debt, saving for a car or house, boosting retirement, whatever three financial goals are most important to you. There aren’t any right or wrong answers here. This is all about you.

Step two is to rank them in order of importance.

Then comes step three: choose a strategy. We have (you guessed it) three of those as well.

Three Options

There are three smart ways to treat your bonus that will reward you for your hard work both now and for years to come. And if you read to the end, we’ll share a bonus tip (see what we did there?) that you’re really going to like.

Waterfall Plan: Just as a waterfall cascades down a mountain, the waterfall plan “cascades” your bonus through your three priorities. If paying off a credit card is your top priority, then use your bonus to pay it off entirely. Use whatever’s left to fully fund your second priority, and then use what’s left for your third most important item. If you didn’t earn enough to pay off all three, that’s fine. But hold a little back. (More on that later.)

Life in Balance Plan: Use your bonus in equal amounts for all three priorities. The psychology of making a dent in your three top financial priorities will be very powerful. Again, allocate most, but not all, of your bonus.

Podium Plan: Again, allocate money towards all three priorities, but not in equal amounts. Think of an Olympic podium, where winners receive a gold, silver or bronze medal. In this case, choose your gold, silver and bronze priorities. Put half toward priority one, earmark 25% for your second most important priority, and then a bit less than 25%, say 15% as an example, toward the third. What should you do with the little bit left over? That’s where the fun comes in.

Reward Yourself

No matter which plan you choose, we highly recommend one more step. (I know I said three, but you deserve step four.)

Use a little of your new money to reward yourself. Go on a nice date, get your car detailed, do something a little indulgent. After all, you earned it.

Not only will it make it easier for you to then allocate the rest towards your long term financial goals, but you’ll have something to show for it both now and later.

And that’s a bonus all by itself.

Again, the key is to have a plan before your bonus hits your bank account. If you’re not sure how much it’s going to be, have several plans. “If I get $500, I’ll do this. If I get $2,000, I’m going to do that.” Having a plan before you have the money makes it much more likely that you’ll make the best decision.

Not sure what to do? Start by talking to a CFP® Professional, who can serve as a trusted guide and provide you with the expertise and insight you deserve in all facets of your financial life.

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