What to do with your year-end bonus

Business of Your Life Financial Planner Alicia Reiss joins Yahoo Finance Live to discuss how one should spend a year-end work bonus, tax implications, and long-term financial goals.

Video Transcript

JULIE HYMAN: It is bonus season. And for a lot of American workers, this season, it means they're getting a nice little addition to their paycheck, especially at a time that is very competitive in terms of finding workers on the part of employers. But what should you be doing with that bonus? That's a big question.

Alicia Reiss is with us now, Business of Your Life financial planner. She joins us as part of our Financial Advisors Corner. Alicia, first of all, I guess the question is, when you get the bonus, should you be thinking of it as sort of just part of your regular pay, or do you think of it sort of differently when you're figuring out what to do with that money?

ALICIA REISS: First, thank you so much for having me today. And that's a great question. When you first get a bonus, you should actually be thinking about it as more supplemental income. So from a financial planning standpoint, we typically don't want to have to-- so obviously, when it comes to bonuses, sometimes they're variable. Sometimes they're not guaranteed. So we certainly don't want to have to rely on a bonus to pay for our necessary expenses.

So from a financial planning standpoint, when we're looking at what can someone afford each month in terms of housing or their living expenses, we don't want to include the bonus or consider the bonus in that calculation. So we do see it as supplemental income. And from that standpoint, the way that I like to approach a bonus is-- or other lump sum of money-- is to think about it strategically when you're looking over your financial plan and your financial goals, and to think about strategically using it to accomplish your goals or to make progress towards your other financial goals.

BRIAN SOZZI: Alicia, let's say I pull in $100,000 a year bonus here. It was a good year for me. I really kicked butt at work. You know, what component of that should go into the stock market?

ALICIA REISS: So, again, everybody's situation is different. However, if you were to get that sizable of a bonus, yes, we would step back and take a look at your different financial goals. So first, we're going to-- for most people, we would probably start with making sure that they had enough cash reserves set aside in an emergency cash savings account. And we would also take a look at any outstanding debt that they had.

And just to one thing that I like to keep in mind is that we don't need to just focus on one financial planning goal. It's possible to make progress in different areas. So, you know, after taking a look at maybe a cash reserve and any outstanding maybe high interest debt that you have, we would certainly take a look at funding an IRA, an Individual Retirement Account.

And most likely if you're earning a bonus, you are earning income. And anyone with earned income and/or a spouse can contribute to an Individual Retirement Account. And right now, we would be able to contribute for the year 2022. But up until tax day, you still have time to contribute for 2021. And so that's obviously within your IRA, you would invest.

And then the next place would be, I think, an often overlooked account is actually just the regular taxable brokerage account, where individuals-- it's different than a savings account in that you actually can keep cash, but you have the ability to invest that money. And within that account, going back to your question, we would look at what financial goals you have.

And so we can invest within that account not only for the longer term for retirement, but we can also invest for more medium term goals that you may have, let's say, in 10 to 15 years. So it's not necessarily a set amount for everybody. We would kind of look at all of those different components and factors of somebody's financial plan.

JULIE HYMAN: And finally, Alicia, given all of the inflation that we have been talking a lot about, if you're getting this lump sum right now, the value of your money is likely to deteriorate, right? So just in 30 seconds, what is your favorite inflation-proof or inflation-resistant investment to recommend to folks right now?

ALICIA REISS: So I have to say that's-- just like you said, this is kind of currently something that individuals are dealing with. And if it's more short-term money that we're talking about and if interest rates are not moving up in terms of in a savings account or CD, and we're looking for another cash-like investment, we can certainly look at buy bonds that-- again, for a cash position to keep up with inflation. Otherwise, if we were investing for the long-term, it would be in equities.

JULIE HYMAN: Gotcha. All of that very important to keep in mind right now. Alicia Reiss, thank you so much for being here, the Business of Your Life financial planner joining us as part of our Financial Advisors Corner.