At my job, as part of my total compensation, I receive an annual bonus. The bonus is based off of how well the company does in relation to several financial and social responsibility goals. Based on my position, my target payout is equivalent to 25% of my annual salary. If we have a really bad year, I can receive nothing. If we have an incredible year, I can receive double. In 2018, we had a decent year and slightly exceeded our targets. Because of the slightly better year, my bonus for 2018 was ~$29,300 (the highest I’ve ever received). March 15th was bonus payout day, so many people within the company had a decent chunk of change drop into their bank accounts.
What Does Everyone Else Do With Their Bonus?
Most people don’t talk about what they do or don’t do with their bonus. The most people will discuss is talking about turning off their 401k contribution so their bonus doesn’t go towards their 401k. This year, I have heard a few people discussing using the bonus to put in a new swimming pool. And inevitably, over the next few weeks, there will be a noticeable uptick in new cars in the parking lot. Others will start showing up next week in new clothes or with new handbags. All of that stuff is great, and I’m not going to say what anyone should or shouldn’t do with their bonus. I don’t pretend to know their financial situation. The only thing I know is where our finances stand today, and where I want to see them in the future.
What We Do With Our $30,000 Bonus
The 401k Stays On! (-$4,200)
I know that keeping my 401k deduction on means I won’t get as much on the bottom line. But, I can’t help but be excited about seeing $5,600 dropping into my 401k (14% contribution plus 5% match). It takes out a huge chunk of the $19,000 annual contribution limit in one fell swoop. It also makes sense from a tax stand point. A bonus is taxed (federally) at a flat 25%, so long as we keep our tax bracket below 25% when we withdraw, we’re “making” even more money by not giving it to Uncle Sam… Who happens to take the biggest chunk of the bonus… (~$25,000 Remaining)
After our 401k contribution, the remaining amount is taxed. Most of the bonus goes towards federal and state taxes. There is nothing I can do to pay less; 36% is taken off the ~$25,000 remaining after the 401k contribution. The amount of taxes we paid on this bonus is more than double the combined taxes we have paid so far this year (4x the Federal withholding alone). ~$16,000 Remaining.
Top off Our Roth IRAs for 2018 (-$7,500)
One day, we hope to fully fund our Roth IRAs with weekly contributions. Every year we are increasing the amount that we transfer into them each week. We are almost half way towards our goal of hitting the full annual contribution with our regular pay. But, until then, we will use my annual bonus to finish maximizing our annual Roth IRA contributions. In my IRA, I placed the money into a Long Term Bond ETF until I decide how to deploy that money. In my spouses’ IRA, we placed that money directly into the target date retirement fund. ~$8,500 Remaining
Invest in our Kids (-$4,000)
Our oldest has a 529 Plan through Vanguard that we funded with $3,000 on his 1st birthday. Every birthday (using the bonus) we plan on adding $1,000 to the account. This year, we will be starting our 2nd kids 529 plan with another $3,000. I really hope our kids get scholarships so we can take most of this money back for ourselves! But, if they need some help with college, the money will be there to lighten the burden of student loans. Assuming we have more kids, I doubt we will be able to fully pay for each child, but something is better than nothing! ~$4,500 Remaining.
Home Improvement (-$2,500)
We have a couple of projects that need to get done. One of them is repairing 50 ft section of fence that has rotted. We just received a quote for… $3,600 – way more than we want to spend. Instead of spending that much, we will be buying the materials and watching a lot of YouTube videos to DIY it. We estimate that it will cost ~$1,000 and a long weekend to replace the old fence and put the new sections in.
Also, we plan on spending ~$1,500 later this year to update our guest bathroom. We have found that the floor is prone to leaking when water splashes on it. With two young kids, the splashing is only going to get worse. So we think it is important to make changes now before the kids get any older and shutting a bathroom down for a couple of days becomes “impossible”. ~$2,000 Remaining.
Emergency Savings (The Rest)
What we have left over after everything above will head into our Ally Savings account for our emergency savings. When it is all laid out, it makes the bonus seem less exciting. Saving (basically) all of it really isn’t that fun, and won’t get us a ton of Instagram followers. However, it will get us closer to financial independence, and that’s exciting to us!
Even with our bonus, we stand by the principle of paying ourselves first. Other than a new bottle of whiskey, we don’t celebrate the windfall with anything extravagant. (This year we bought Jack Daniel’s Single Barrel Rye – it was on sale, and is delicious.)
The enormity of receiving such a substantial amount of money is not lost on us. Every year on “bonus day” my wife and I just shake our heads at how fortunate we are. In one day, I receive a lump of cash that is more than I received for an entire year working at my first job and making $14/hr just 8 years ago. In fact, this years’ $30,000 bonus is more than ~25% of people in the United States earn in a full year (based on 2013 ACS Census).
If we are fortunate enough to continue to receive annual bonuses, we should be able to set aside the money that used to go towards our Roth IRAs. Our long term plan is to use the money to replace the original wood siding (that has a lot of wear and tear) on our home. Because of that large future expense, it is doubly important to fully fund our Roth IRAs through the year and not rely on the bonus. Eventually, we would also like to use a larger portion of the bonus to help pay for college costs (if our kids decide to go that route). There are a lot of possibilities, and we are grateful to have them.
The impact of the bonus to our net worth should be obvious in next week’s update (assuming the market doesn’t tank). By 2030, if every year is like last year, we will have received $322,300 in annual bonuses. $61,000 would have gone towards our 401k, and nearly $95,000 of it will be paid in taxes. Overall, it will be a key component of us reaching our Million Dollar Retirement Account by 2030, and we are so fortunate to have it.