How to best allocate my unexpected bonus?
September 6, 2011 1:29 PM   Subscribe

Unexpected bonus of $1,000. How to handle - savings, 401k, something else?

(You are not my financial planner and other various disclaimers.)

I'm in my late 20s and I work for a small nonprofit. I'm about to receive an unexpected bonus of around $1,000 after taxes. How to best put this to use?

This came as a nice surprise, as our bonuses are usually about 1/3 of that amount, and happen during a different part of the year. My instincts are either to put this right in my savings account, or to put most/all of it into my 401k, minus $100 for something immediate and fun, but I need some guidance as to what is most prudent.

Pertinent facts:

-My annual income is $42,500 pre-tax.
-I have no credit card debt.
-I've got around $12,000 in my 401k, and I deposit ~$2750 annually. My employer makes an additional contribution equivalent to 3% of my annual compensation.
-I'm generally thrifty, but at my current income level, it's hard to sock away more than $25-50 a month to my savings.
-I have a bit under $5,000 in savings, w/interest rate of 0.08%. I treat it as an emergency fund and always "repay" if I "borrow" from it for expensive items (e.g. airfare). I've been meaning to at least transfer savings to a slightly higher yield account, but I am lazy.
-I live with my significant other in an expensive urban area. No car. SO and I keep finances separate, and SO has notable credit card debt. No kids (or plans for), no illusion of owning a house anytime in the foreseeable future. There is a nonzero chance I will be a trailing "spouse" when SO changes jobs in fall of 2012.
-I have student loans of ~$22,000, with monthly payments of around $300, which is manageable.

Any thoughts? I'm quite lucky to have this come my way, and I'd love some guidance. Savings? 401k? Blow it all on shoes (j/k)?

Throwaway email:
posted by anonymous to Work & Money (14 answers total) 2 users marked this as a favorite
Given that you face a chance of being a trailing partner in the relatively near future, I'd just stash it in savings until that relocation/job-hunt/etc is either resolved or officially won't happen. At that point I'd just chuck it into student loans with a sneer, because I like sneering at my student loans.
posted by Tomorrowful at 1:33 PM on September 6, 2011

Set aside a little silly money out of your bonus for yourself to spend on something frivolous. Something you'll enjoy and think "I earned that" when you use it.
posted by essexjan at 1:35 PM on September 6, 2011 [2 favorites]

Do you own something you need to constantly replace or fix? Maybe a winter coat, or a pair of boots, a power tool, a kitchen knife? Use some of the money to buy a high-quality one-of-those that will last decades instead of months. This way you'll end up making money, in the long-term.
posted by griphus at 1:37 PM on September 6, 2011

Buy yourself a $1-200 toy (or give to charity) and add the rest to your emergency fund.
posted by ghharr at 1:45 PM on September 6, 2011 [1 favorite]

Depending on what your monthly expenses are, your emergency fund is probably not high enough right now, so I would lean toward putting extra money there. It's partially just personal preferences but I think 6+ months of expenses in an emergency fund should be a top priority before pretty much anything else financially, so since you are already contributing a decent amount to your 401k I don't think you need to put it there. Also it depends on your interest rates but paying down student loans ahead of time is never a bad idea if you can afford it, it will save you a lot in the long run. You could also consider using this as an opportunity to open a Roth IRA, since you could invest in whatever you want and withdraw your contributions at any time, but you should probably just wait until your savings grow past what you need in your emergency fund and then move the extra to a Roth IRA (or just stick with putting more in your 401k).
posted by burnmp3s at 1:46 PM on September 6, 2011

I've been meaning to at least transfer savings to a slightly higher yield account, but I am lazy.

The highest savings yields right now are a whopping 0.99%, so right now you are only losing about $45 each year this way. You should consider the annoyance of changing accounts versus $45 a year.

You need much more in your emergency fund. I would chuck it all in there.
posted by grouse at 1:48 PM on September 6, 2011 [3 favorites]

All to 401k is boring but it's definitely worthwhile to do as much as you can. As someone who eventually combined finances with a partner who had some debt, the account balances weren't affected but the monthly budget sure was, and my IRA contributions ground to a halt. Now it's all re-established and we both have retirement account contributions, but at the time I was very glad of the "before years" when I'd built up stuff that was growing undisturbed the whole time.

My opinion - half to 401k, half to savings. Or to the next big item you'd end up tapping your savings for, kind of same difference, but it's a bit more fun to know exactly when you're spending your bonus money.

Don't stress about the interest level in your savings account - for $5000, trying to find and manage a higher-yield vehicle is nice but not a great investment of your time. 1% is about as good as it gets right now, at someplace like ING savings account. That has about a 3-day transfer delay, which gets a bit hairy in true emergencies, so call it $1000 local at 0.08% and $4000 remote at 1%, that's $40/year interest. Or $40 that you'd have to spend an hour on setting up an account and maybe 5-10 minutes a month checking on transfers etc. Maybe it's not worth it to you.
posted by aimedwander at 1:49 PM on September 6, 2011

The key question here is rates of return. You want to maximize the post tax rate of return. Which means factoring in tax rates. I'll assume inflation affects everything equally here.

401k: 7 percent market average returns, but taxed at the marginal tax rate when you retire.

savings: .08 percent x marginal tax rate. So even worse than it seems.

student loans: 5 percent x (1-marginal tax rate)? Mine are 2.25 percent, but yours could be much higher. These are usually tax deductible.

spouses credit card: 14 percent? I honestly have no idea how this works for unmarried yet committed couples, but if you're truly in it for the very long haul, there will come a point where finances can't be kept separate, either because they're old / disabled and mentally incapable, or medical expenses have bankrupted them and lifesaving treatment blah blah blah. This is a long time for a payoff though, that mostly accrues to your SO. I could imagine an agreement by which you lend it to them at a lower rate than the CC is charging: win-win. Well, win-win-lose but nobody likes credit card companies.

So it seems like you'd either put it in the 401k, or if you feel you'll need it soon, a better savings account. I'm not sure how financial separation works with 'trailing spouse' status -- do they float you money while you look for a job? And if you need a car to commute? If no, then you'd obviously need more liquid cash. How much more I have no idea -- I consider 5k to be a sufficient emergency reserve where I live, especially with a roommate contributing to rent and shared expenses.

You could perhaps open up a Roth IRA and leave it in secure, liquid (low interest...) investments, since you can pull contributions penalty / tax free at any time should you need them. If in 12 months it's revealed you're not moving, you can move the investments in the Roth to the market, and if it turns out you need the money, you pull it out. You might need to watch for minimum investments though; I think most of the 'cash reserves' accounts will be fine if you fall below the minimum?
posted by pwnguin at 1:59 PM on September 6, 2011

Personally, I'd be putting it in the emergency fund. How many months of expenses could you pay out of your current fund?

Or you could put it in a Roth IRA, as suggested above, so you're both contributing to retirement savings *and* keeping the ability to use it as a backup emergency fund if things got very bad. Just make sure you put it in something boring (like a money market or maybe a bond fund) so you know the money will actually be there in the event of an emergency. Emergency money shouldn't go in stocks.
posted by pie ninja at 2:50 PM on September 6, 2011

Pish to sense, spend it on something fun. You already have some money as backstop. Buy something that you will love and enjoy. I bought a great sleeping bag with my last bonus and love it everytime I'm snug and warm when camping.

You could get a nice bit of furniture with $1000. You'll be sitting on the rocking chair in 50 years time glad you bought it and didn't pay off your student loan four months early.
posted by cluck at 3:36 PM on September 6, 2011

Consider series I US savings bonds.
posted by monstrouspudding at 5:42 PM on September 6, 2011

Please don't buy furniture, or anything else for that matter. Take your bonus, another two grand or so from your savings, and go somewhere awesome for a couple of weeks.
posted by lobbyist at 7:17 PM on September 6, 2011

The prevailing guideline is that you should have 6 months of expenses socked away... Just in case. think of how much more comfortable youll feel knowing you have an extra month's rent waiting for you, should you need it.
posted by samthemander at 9:08 PM on September 6, 2011

Every tax rebate or sudden windfall I've ever gotten (in the last six years or so) has gone either into savings, towards student loans, or some sort of payment that needs to be made. But hey, spend a little on yourself, too. Personally, right now, if I had $1000, half would go into my depleted savings, and the other half towards my student loans.
posted by gc at 12:51 PM on September 7, 2011

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