Five Strategies to Use a Bonus or Fund
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities )
Have extra money coming in? Here are ways to put your money to work for you now, so you can potentially reap the rewards down the road.
Many companies provide some form of incentive compensation as part of their overall compensation package. In fact, 85% of U.S.-based companies paid out bonuses in 2018, according to a recent survey by World at Work, an association of human resource professionals. 1 Many of these same companies also offer spot bonuses and raises during the year to recognize good work and motivate employees to continue to drive results.
If you’re fortunate to see a boost in your paycheck—whether it’s through a bonus, raise or promotion—it may be very tempting to spend this extra cash on a new electronic gadget or fun vacation, but using your bonus on long-term, big picture goals may lead to greater happiness in the long-run.
What should you do with your extra compensation? Start with the basics. Focus on two important objectives: catching up and getting ahead. Here are five strategies to put your money to work for you now, so you can potentially reap the rewards down the road.
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1. Pay Down Part or All Outstanding Debt
If you have debt, such as student loans, car loans or credit card debt, a bonus can be a great way to tackle it aggressively. And if the interest rate on your debt is high, make this a top priority. The money you pay in interest can cost you thousands over time.
2. Boost Your Investment In Your 401(k) and Max Out Other Retirement Accounts
Hopefully, you’re already contributing to your company’s 401(k) retirement account and taking full advantage of any available company match. When you receive a bonus or an increase to your salary, consider increasing your contribution, since the more money you set aside today, the better off you’ll be in the long run, helped by the power of tax-deferred growth potential.
Also consider maxing out other retirement plans, such as a Traditional Individual Retirement Account (IRA) or a Roth IRA. There are a few key differences between the two that you should understand before setting one up or making contributions:
- Income Limits: Anyone under age 70 1/2 can open and contribute to a Traditional IRA as long as they have earned income; however, with a Roth IRA, there is no age limit but there is an income cap (only married couples with Modified Adjusted Gross Income (MAGI) of $193,000 or less, or a single person with MAGI of $122,000 or less) are eligible to make a full contribution. The maximum annual contribution for both accounts in 2019 is $6,000 (or $7,000 for those age 50 or older).
- Taxes: Funds within an IRA have the potential to grow on a tax-deferred basis. Contributions to a Roth IRA are made with after-tax money, so you can withdraw the contributions tax-free, penalty-free any time. The earnings can be withdrawn federally tax-free, penalty-free once you reach age 59 1/2 and the account has been open for five years. 2 With a Traditional IRA, the contribution may have been deductible or non-deductible. 3 Deductible contributions and earnings are taxed when you withdraw them. Non-deductible contributions are not taxable but the earnings are. Withdrawals made prior to age 59 1/2 may be subject to a penalty tax unless an exception applies.
Roth IRAs may be particularly well-suited to millennials and those starting their careers because of the ability to withdraw contributions without tax or penalty if necessary. Your Financial Advisor can help you make the best decision for your particular situation.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)
