So you’ve worked long and extra hard all year long, and your boss – who you thought didn’t even notice – stuns you with a generous and unexpected big cash bonus.
Financial experts have given some tips to CNBC.com on just how you can best spend that extra cash – and how to avoid being a New Year’s fool.
Here are four mistakes to avoid:
- Spend it all right away. “Come up with a plan before buying anything. And consider the ‘50-30-20 percent rule’ when dealing with any windfall: It suggests that 50 percent of the money goes straight to savings — into your checking account, emergency fund or a long-term savings or investment account — while 30 percent goes towards funding your lifestyle and 20 percent goes towards fun,” CNBC explained.
- Spend it on the wrong things. “To get the most out of your money, spend on things or experiences you actually enjoy that will add value to your life. On that note, consider investing in yourself, whether that means taking a class, paying for a gym membership or hiring a career or success coach,” CNBC said.
- Put off investing. “A small amount of money invested earlier will earn more than a large amount of money invested later. That’s because the more time your money has to work for you, the more time it has to grow, thanks to compound interest,” CNBC explained. “Take part of your bonus and put that money to work in a retirement savings account or other investment vehicle, such as a robo-advisor or low-cost index fund.”
- Try to show up your friends. “If you make a habit out of choosing where to eat, what to wear, and what gadgets to buy based on what your friends do, you can end up wrecking your budget … and blowing through your bonus,” CNBC said.
Meanwhile, some financial experts that year-end and holiday bonuses of equal amounts to all employees (either in dollars or in a flat percentage of their salaries) is an outdated idea and sends the wrong message to workers in this brave new labor market.
questions what he calls the “peanut butter” approach of bonus awards
“What message do you think the “peanut butter” approach sends to a top performer who put in extra hours and great effort to capture a huge account from your number one competitor? Is it fair for that person to receive the same bonus as a poor performer who is on the brink of being let go,” Forbes.com contributor Jeff Hyman recently wrote.
“More companies are seeing the folly of the holiday bonus. From 2016 to 2017, the percentage of companies providing holiday bonuses declined from 75% to 63%,” he said.
Hyman argues that a far better approach is to tie compensation to performance and to allocate a disproportionate percentage of that capital to reward your best people.
“The point of your bonus plan should be to foster a workplace environment where exceptional performance is expected and rewarded, and where subpar performance is neither tolerated nor subsidized," he said. "A hallmark of a well-conceived bonus plan is that it encourages rock star employees to stay at your company when the headhunters call and it helps you to recruit top people from other organizations.”
USA Today explained that bonuses are a delicate situation.
“They can be motivating or inspiring, but they can also lead to resentment. Make sure you hand them out – or don't – with a clear rationale behind your choices. You may never choose to share your logic, but it's important to make sure you're fair and go by merit, not by your personal relationship with each employee,” it said.
“Bonuses should reflect the health of the business,” USA Today explained. “If you had a great year, it makes sense to share with your employees. There are, however, extenuating circumstances. If your great year followed a number of bad ones, maybe you need to direct your profits toward paying down debt,” it said.
“If that's the case, be transparent. Thank your employees and tell them how their work has made the company stronger and gotten it out of debt. You may even want to make it clear that if a similar performance happens next year, some of that profit will go to them,” the report said.
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