For those lucky enough to receive a holiday bonus, you might be wondering how to make the most of it in this economy. Here are three strategies worth considering that will make your bonus "go farther."
Pay Down High-Interest Debt OR Fund a High Yield Savings Account
Which one is right for you? This depends on what kind of debt you have at the moment.
Is your home financed at Let me repeat: HIGH INTEREST? If you locked in a 3% interest rate on your mortgage then leave it alone. If you have a variable rate of 8% and climbing, then that’s a different story.
Perhaps you should consider your student loan debt. When you bought, when you graduated, and a host of other factors play into your debt.
Remember that low-interest debt is a wealth building tool. You don’t want to add principal to a debt payment with a low interest rate. Why?
If the interest rate on your debt is lower than the interest rate you can earn in a high-yield savings account, your money does more for you in the savings account.
Why pay down 3.5% debt when you can earn 4.4%? You’d be netting .9% and we want to be in the black, right?
High-yield savings accounts currently offer interest rates that can outpace the interest on certain types of debt, making them a more attractive option for growing your money.
Purchase a Guaranteed Buffer Asset
If high-interest debt is not an issue for you, consider putting your holiday bonus into a buffer asset with guarantees, such as a government i-bond.
While it might not be as flashy as some other investments, it offers stability and long-term growth potential. Unlike the latest tech stock, government bonds are known for their reliability.
These assets work to manage risk in your retirement. Opportunities to save a bit of money into buffer assets each year will set you up for a comfortable stream of income IN ADDITION to your typical retirement savings.
Overfund Your Life Insurance Policy
Overfunding a permanent life insurance policy is a strategic financial option for people who need a certain level of life insurance coverage. Many people don’t know they can put extra cash into their insurance policy and earn guaranteed interest.
When you over fund your policy beyond the premium, that additional amount earns tax-free interest. Think of it as a financial double whammy - not only do you secure your family's financial future with a death benefit, but you also accumulate cash value with tax-free accumulation with guarantees.
The beauty of overfunding is that it's flexible. You can choose to overfund your policy whenever you wish. You do not have to commit to a specific, continual payment. And unlike an i-bond, life insurance does not have an annual contribution limit. You can only purchase $10k in i bonds per year, but you can make much more tax-free opportunities utilizing this strategy.
Conclusion
Your holiday bonus could pay for holiday gifts, or send you on a fun vacation, but it could also be a valuable financial resource if you want it to be.
Whether you decide to pay down debt, invest in a guaranteed buffer asset, or overfund your life insurance policy, make a choice that aligns with your long-term financial goals. Remember, smart financial decisions during the holiday season can lead to a more prosperous future.