Did You Find a Little Extra in Your Stocking This Year?

December 25, 2013

As the year winds down, some employees may find a little extra in their stockings this year in the form of profit sharing, year-end bonuses, or other such windfalls.  Such surprises may leave them wondering “What should I do with this?”  Well, if you’ve managed to stay on the nice list all year, here are a few ideas as to what you can do with this extra bit of Christmas cheer:

Save it for a rainy day

Setting money aside in case something unexpected happens is rarely a bad idea, yet nearly half of employees that have taken a financial wellness assessment say they do not have an emergency fund to cover unexpected expenses or to pay bills for a few months if they lose their job.  For a little more perspective on why you should have an emergency fund—and how much it should be—check out http://www.thefreefinancialadvisor.com/savings-debt/cash-reserve/.

Pay off some debt

If you feel as though you have enough socked away for that unexpected event, then why not get rid of some (or all) of that financial “fat” you accumulated during the holidays.  Target high-interest debt like credit and store cards before going after tax-favorable debt like student loans and mortgages.  If you really hate debt, don’t stop until it’s all gone.  If you are comfortable carrying low-interest debt, don’t stop until that’s all you have left.

Save it for a future goal

Are you planning to buy a home in the next few years?  If so, you may want to hold on to this money so that you can make a larger down payment.  If you put down 20% or more you can avoid having to pay primary mortgage insurance (PMI) and get favorable terms on your mortgage.

Your employer may allow you to defer some or all of that money into your 401(k).  If you have just a pre-tax 401(k) then there is not too much to think about, but if your plan offers pre-tax and Roth contributions, then a little more thought is involved.  The conventional wisdom is that if you expect to be in a higher tax bracket in retirement, then you should contribute to the Roth today.  For a different view on this conventional wisdom, visit http://www.forbes.com/sites/financialfinesse/2012/09/12/why-the-pre-tax-v-roth-decision-is-more-complex-than-it-seems/.

The good news is that none of these options would be a bad decision.  My suggestion is to go with your gut and to be content with whatever decision you make.  In cases like this, only hindsight is 20/20.

Have a very merry Christmas and a happy and safe New Year!