Dec 23, 2022
Planning for Your Year-End Bonus

It's the holiday season and, as part of your holiday traditions, maybe you watch National Lampoon's classic movie, Christmas Vacation. To jog your memory, the main character, Clark Griswold, is “surprised” by his year-end bonus—not the cash he had already spent to install a swimming pool, but a Jelly of the Month Club membership.
Seeing this movie as we head into year-end may have you thinking about what your own 2022 bonus might be. In some industries, annual bonuses are often paid out in the first quarter of the following year (in this case, January to March 2023). It’s safe to say that 2022 was an “interesting” year (high inflation, market volatility, rising interest rates), so sitting here in late December, it's hard to know what bonuses may look like.1 We know it's been a volatile year in the stock market, and although company earnings and employment numbers have largely been strong, companies are also fighting rising costs and increased wage growth.2 This MAY mean bonus figures do not come in at the level employees expect or close to what they received for their 2021 bonus.
As a financial planner, I recommend thinking ahead to the possible outcomes, so you’re prepared to make good choices no matter what that bonus amount ends up being.
If you do receive a cash bonus, let's discuss three common uses for you to consider.
Pay off (or reduce) high-interest debt
First, if you have any high-cost debt, consider paying it off or at least paying it down. Interest rates have been rising over the last year, which means if you hold a variable rate loan, it could be costing you significantly more in interest.3 Review any credit card bills, car loans and home equity loans to verify the rates you’re paying and the terms of each debt obligation. If your cost to service the debt is not pegged to the low, locked-in rates we had been experiencing over the last few years, consider paying down or paying off these debts.
Save for large, known expenses
If you’re facing a large expense like a wedding, new car or a vacation within the next six months or so, consider dedicating some of your bonus to help offset the cost. You may also wish to bolster your emergency fund for those large, unknown expenses like significant home repairs or an unexpected major illness. One advantage of higher interest rates is that your cash can earn interest in a money market or high-yield savings account while you wait to deploy it.4
Invest for the long term
Another silver lining after a year like 2022, in my view, is that many stocks and bonds appear attractively priced compared to a year ago. Valuations are down and bonds may be yielding somewhere in the 5% range, which is a yield that investors haven't seen in approximately 15 years.5 With stocks and bonds both looking attractive overall from a valuation perspective, it may be an advantageous time to get this bonus working for you and contributing to the growth of your long-term wealth.
I always recommend working with your tax preparer to understand any tax consequences of the bonus you receive. It’s also valuable to work with your wealth advisor to determine a course of action that makes sense for you and your personalized financial plan. For most people, jellies of the month are not part of the equation!
1 https://www.tma-invest.com/inflation-market-volatility-and-your-portfolio
2 https://www.usatoday.com/story/money/economy/2022/10/25/rising-wages-good-workers-not-inflation-why/10584480002
3 https://www.forbes.com/sites/qai/2022/09/07/why-are-interest-rates-going-up-heres-what-investors-need-to-know-about-it
4 https://www.forbes.com/sites/financialfinesse/2022/10/24/how-to-take-advantage-of-higher-interest-rates
5 https://treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates
ABOUT THE AUTHOR

Abigail Rosen, MS Financial Planning
Abigail (Abby) Rosen is a CERTIFIED FINANCIAL PLANNER professional with over 17 years of experience in the financial industry. Prior to her career in finance, Abby was an officer in the United States Navy. Abby is responsible for managing client relationships and coordinating all aspects of client service for the team. Abby specializes in working with corporate executives to help them take full advantage of their available benefits, implement in respect to employer stock concentrations and manage their stock option strategies. She has a designation in Global Financial Planning.
She graduated with a Bachelors of Arts from the College of the Holy Cross and received a Master of Science (distinction) in Financial Planning from Bentley University. She was 2020 Citizen of the Year for her work as Treasurer of the New Jersey Psychological Association Foundation, is Treasurer of the Brooke Healey Foundation and a Girl Scout Troop Leader.
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