Horizon Investments Head of Portfolio Management Zach Hill discusses concerns surrounding markets and the economy in 2023.
With the end of the year fast approaching, many workers expect to receive bonuses from their employers.
Robert Half said in early November that one of its surveys found that more than half of American companies, 57%, this year said they planned to give out year-end bonuses to employees. That’s down from 2021, when 77% indicated they intended to do so, according to the business consultancy.
While there are many ways for a person to use their end of the year bonuses, some good things they can do with them include paying off debt, saving, investing and building an emergency fund, according to experts.
A person holds a jar full of savings. (iStock/iStock)
Year-end bonuses can serve as a “good way to tackle” debt “aggressively”, according to the Summit Wealth Management Group at Morgan Stanley.
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In mid-November, the Federal Reserve Bank of New York said that at the end of the third quarter, total household debt had hit $16.51 trillion, up $351 billion from the previous quarter.
“Deciding how and when pay off debt is dependent on your income or overall cash flow, your risk tolerance, your goals and your time horizon for investing,” Emily Irwin, senior director of advisory and planning at Wells Fargo Wealth & Investment Management, said in a statement to FOX Business.
According to Irwin, people who want to determine their risk tolerance while trying to figure out how to spend their bonuses should ask themselves how they feel about their debt, the status of their emergency fund, and how much they can set aside for investment or repayment of debt. One should also “consider your goals,” she said.
“You don’t have to choose between using your bonus to invest or pay down debt — you can do both,” Irwin also said.
It can be advantageous to save part or all of your year-end bonus annual savings targets. It can also help people get closer to their long-term plans, according to Morgan Stanley’s Summit Wealth Management Group.
If possible, Irwin recommended saving 10% of paychecks as a starting point to create annual savings goals and gradually increasing the amount until it “ideally” reaches 20% allocated to retirement and investments.
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“If you are an employee participating in a 401(K) planit is likely that a portion of your bonus will be allocated to your retirement account (unless you make a timely change to your election),” Irwin said in the statement. “This can be a great strategy because it earmarks your bonus dollars for retirement. years.”
401(k) plans ensure that Americans have enough money to live on after they retire and no longer receive an annual salary. (Getty/Getty Images)
That Internal Revenue Service (IRS) says people under 50 can contribute up to $20,500 annually to their 401(K)si in 2022. In 2023, this limit is will go up by $1,000 to $22,500. People aged 50 and over can contribute a maximum of $27,000 in 2022 and $30,000 next year, according to the tax authorities.
For 2022, the contribution limit is IRAs is $6,000 for people under 50 and $7,000 for those over that age. The limit for 2023 is slightly higher, with ages under 50 allowed to contribute $6,500 to IRAs and ages 50 and over allowed $7,500.
To invest year-end bonuses, new investors could choose index fundsJP Morgan Wealth Management’s Elana Dure wrote in an article. Aside from index funds, some other potential options for investors may include individual stocks, exchange-traded funds or mutual funds, according to the article.
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“The idea is to get into the mindset of saving and investing with the motivation as a reward and enhancing flexibility,” Irwin told FOX Business.
A coin is dropped into a piggy bank in this staged photograph taken with a tilt-shift lens to illustrate the theme of risk in Oradell, New Jersey, on June 18, 2015. (Photographer: Ron Antonelli/Bloomberg via Getty Images) (Photographer: Ron Antonelli/Bloomberg via Getty Images / Getty Images)
Another option is to withdraw some bonus money into your emergency fund, according to the JP Morgan Wealth Management article and Irwin. Irwin said it’s an “easy way to set yourself up to handle both fun and stressful, unexpected events,” whether it’s an impromptu trip or your car needs repairs.
“I suggest people draw enough into an emergency fund to get to a point where they’re $1,000-$5,000 saved — you may be able to fund all or most of your emergency fund with your bonus,” she said.
Other steps people can take to reach their emergency savings goals, Irwin said FOX Businessincluding eliminating or reducing some expenses.
