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How to make the most of bonuses and unexpected income windfalls, expert explains

Buckingham Advisors managing director of financial planning Nicole T. Strbich joins Yahoo Finance Live to discuss how to manage an annual bonus or other windfall to achieve your financial goals.

Video Transcript


RACHELLE AKUFFO: New year, new financial goals. As you collect your end of year bonus or pay boost, how can you make the most of these financial windfalls? Buckingham Advisors certified financial planner, Nicole Strbich, joins us now for our Financing Our Future segment, brought to you by Synchrony Bank Savings. Good to see you. So yes, when people first get that lump sum, it could be like herding cats, trying to figure out as all your bills and your loans sort of calling for your attention. Where should people start?

NICOLE STRBICH: Thank you for having me. You're exactly right. It really is sometimes a struggle to stop and think about what your plan is. And so that's really the first suggestion, is to set a plan, really sit down and think about what your goals are and what your current needs are with regard to that bonus. And setting that plan will really help structure and strategize that so that way, you don't inadvertently spend some of those funds on something that wouldn't matter as much in a week or a month.

So start looking at the structure for your short-term goals and maybe some of the areas that you really need to focus on. So this could be something like adding to an emergency fund, making sure that's at a big enough level. Or if you do have some sort of high interest debt like credit card debt, those could be initial suggestions to focus on.

Then we look at areas that you would get a benefit from contributing to now. So maybe it's making sure you're getting your match on your employer retirement plan or an area where you could get a tax deduction now. Then we could look a little farther out and see if there are areas there's a longer term goal that you could get a benefit from having compound growth in the future. Really starting there as a structure is important. Then, looking at the future and saying, where do we really need to focus, and having all of those ducks in a row before you actually start employing those funds.

RACHELLE AKUFFO: So in terms of perhaps the share of the money then, how should you really apportion it out when you're trying to sort of do things like build the emergency fund and trying to pay off some of these higher interest loans?

NICOLE STRBICH: I think that's a great question because once we've laid out that plan and you kind of identify all of those big pieces, it can really help structure that. So looking at those short-term pieces first, I think is really important and making sure we're getting to that area. A lot of people suggest maybe a three-month goal for your emergency fund and making sure it's at least at that level. I think it really is depending on your specific situation, your job structure, your income structure, taking that into consideration and if you need to be a little bit higher than that three months.

But starting there and then identifying where those other goals would be and appropriating that. So if we can, by any chance, balance the approach there, I think that's the most helpful. And balancing-- addressing those short-term goals while also sticking something away for the future is really important. And then we also add that balance with having a fun component with this because you've worked hard. You've gotten this bonus because of all of the hard work you have.

Balance is important in life, as it is in finances. And so if you can kind of put a reasonable amount towards something that would be more of a fun expense, I think that's important. And it also helps us from maybe letting that get out of control too much and spending more than you would initially plan to on that fun expense, but if you just set that aside and go ahead and do something for yourself.

RACHELLE AKUFFO: I mean, it's tough. Like, after the few years we've had, people are very much in still treat yourself mode. So what are some of the biggest mistakes you see people made when they do come into, like, an extra bump-up in pay or a lump sum of money?

NICOLE STRBICH: I think that's exactly right. We've been for so many, so long, so many years, essentially, not able to do some of these fun things. So that immediate reaction is to pick that item and just go for it. And that's not always a bad thing. It's really just taking a breath and a pause ahead of that to say, is there anything else that I really financially should tackle first, and then providing that balance. It's great to have that goal and do that fun thing.

And maybe you set up a structure that you'll get there over the next year. So it's part of this bonus that goes toward that and part of the bonus that goes toward more of the things that add to your financial security and your financial future. And so just structuring so you get that benefit of moving toward that fun goal at the same time of having that balanced picture overall.

And the other suggestion I would say is if we can set it aside somewhere that you don't always see it, that may be helpful. So maybe that's setting it in your emergency fund or this fund for that fun expense that you want to create in a separate account so that it's not quite as easily accessible. Or if it's something that's maybe even at a different bank, so that when you're opening that app or you're opening your web page to look at your bank accounts, you don't immediately see it. And it's just a little bit harder to spend.

RACHELLE AKUFFO: There you go. It's that high tech version of putting your credit card in an ice cube and sticking it in the freezer. A little harder to get to, so--


RACHELLE AKUFFO: --you get a little bit of financial responsibility. A big thank you to Buckingham Advisors certified financial planner Nicole Strbich. Thanks so much.