Ask Karen Gibbs

Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

31

January

Making the Most Out of a Bonus

Karen Gibbs

Hi Karen, I may be eligible for a $5,000 bonus in January.  What would you recommend me doing with my windfall?

- Adam, Baltimore

 

women using a laptop and phoneCongratulations Adam!  What a great way to start the New Year.  I’m not sure about your overall financial situation or where you are on the age spectrum, so let me throw out a few suggestions.

First, if you don’t have one, set up an emergency fund.  I would start with $1,000 in a bank savings account.  It won’t earn much interest (current average savings account interest rate is 0.01%).  You can access it in case of emergency but it’s out of reach for everyday purchases.

Are you carrying any debt?  Compare the rates on your car loan and credit cards and put an additional $1,000 to the highest interest rate debt.  That will lower your interest charges and give you more available credit.

Do you have any short term goals such as taking a vacation or making a big-ticket item purchase (e.g. flat-screen TV)?  Place another $1,000 in your short-term goal account or even a Christmas savings account.  Again, you will not be paid much interest on it, but it is available for when you need it.  Having a vacation pre-paid makes it all the more enjoyable.

Have you started saving for retirement?  Even if you have an employer-sponsored savings plan at work, you can open your own Roth IRA at your bank or credit union.  $1,000 invested in an index fund, returning a modest 5% annually, with no additional contributions, will grow to more than $5,500 in 35 years.  If you add the maximum annual contribution of $5,500 every year to that $1,000, your account will grow to just under $550,000 in 35 years.

Roth IRA contributions are after-tax dollars, but once you reach 59-1/2 years of age, you can make withdrawals with no taxes owed!

Do you have children?  Have you started saving for their college education?  If not, take at least $1,000 and open a 529 college savings plan.  Education is the key, whether you’re young or facing retirement.  You can even use that 529 for your continuing education or even training for a new career.

Are you approaching retirement?  Do you still have a balance on your mortgage?  Paying off your mortgage before you retire will give you peace of mind in addition to increased cash flow in your retirement years.  The key to financial independence is to have as little debt as possible.

Are you over 50 years of age?  If so, the IRS will allow you to play “catch up” and add an additional $1,000 to the annual maximum $5,500 IRA limit.

One last thing you could do is to use some of your windfall for philanthropic purposes.  Making a charitable contribution will not only lower your tax bill, it will give you a good feeling inside knowing that you helped someone or some cause.

 

Best of luck to you!

- Karen


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