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Make your bonus pay
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December 11, 2000: 6:59 a.m. ET
Feeling flush with cash? Make it last longer than a trip to Tahiti
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - There's the Armani suit, the diamond earrings, not to mention that exotic vacation you've always wanted to take. Or maybe your living room just looks naked without a leather couch. Whatever your pleasure, you're not shy of ideas when it comes to spending your bonus.
"Definitely splurge. You've earned it," said certified financial planner Mari Adam of Boca Raton, Fla. But, she cautioned, don't treat it like it's found money. Just as you would think twice before blowing your whole paycheck on an extravagance, consider what you can do to improve your long-term savings scenario with that end-of-the-year check.
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 BEST WAYS TO BOOST BONUS BENEFITS
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Bump up 401(k) contributions
Open a Roth IRA
Invest in a good mutual fund
Build up your emergency reserves
Pay down your debt
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Adam and CFP Pat Jennerjohn of Oakland, Calif. recommend using half your bonus for something fun and the other half for your retirement investments and other savings needs. But if you carry debt – on your credit card or through a 401(k) or student loan – now is the time to pay it down, reducing the amount you pay in interest, they said.
Interestingly, Adam said, among her clients "the ones who get the bonuses tend not to have cash." If that's the case for you, use some of your bonus to build up your emergency fund, she suggested.
That fund may come in handy, especially if you're concerned your industry is about to enter a tough cycle or you risk being laid off. "If the economy is indeed slowing down, wouldn't it be nice to have some money set aside?" Adam said.
Or, if your job is secure, think about the good buying opportunities in the stock market you may miss because you're shy on Benjamins.
Cushion your future
Of course, when you keep your short-term financial obligations to a minimum, you're in a better position to maximize your long-term savings.
If you're not already maxing out your 401(k) contributions, consider putting your bonus in your savings account and boosting your retirement plan payments going forward. Even adding just 2 percent to what you already invest in your 401(k) can add up to a lot over the course of 20 or 30 years, Adam said. This is also a recommended strategy if you get a raise, Jennerjohn noted. Your take-home pay stays the same but your 401(k) account grows at a faster rate.
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Uncle Sam is going to want a piece of that action."
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Patricia Jennerjohn, CFP |
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Then again, "it may be time to open that Roth IRA you've been thinking about," Jennerjohn said. Or, if you're planning a big purchase in five years or more, you might invest the money in a good, all-purpose tax-efficient mutual fund, she added.
Or, if your new year includes plans for a new job, you may not be eligible to participate in a 401(k) plan for several months. That increases your incentive to sock away part of your bonus because you're going to have save for retirement outside of a structured plan.
Three letters: I, R, S
Still eager to spend your bonus down to zero? At the very least, think taxes. "Uncle Sam is going to want a piece of that action," Jennerjohn said.
Indeed, Adam advised, "Before you do anything else, figure out how much tax you owe and set that money aside. ... If you blow it, undeniably come April you'll need it." 
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