Spoiler alert: The “best” use of a 6-figure bonus will always depend on the person who earned it.
Got a bonus? Here are some of the best ways to blow your 6-figure bonus
Congrats—you did it. You grinded your way through a year at an investment bank or law firm, managing to survive the pressure cooker that is your 9-to-9 (like a 9-to-5, but not … get it?).
Now it’s time to reap the rewards that come with all that hard work. and cash that big, fat year-end bonus check. The real question is what should you do with that lump sum? Should you spend, save, invest, or even donate? We will explore the best alternatives for a $100k cash bonus.
How are bonuses taxed?
Contrary to popular belief, bonuses are taxed just like your salary. What’s different is how taxes are withheld. No matter how much is withheld from your bonus check, what you truly owe on the bonus will come out in the wash, aka your tax filing.
There are two ways that bonus taxes are withheld:
- The percentage method
- The aggregate method
The percentage method is very simple. Your employer will issue the bonus and withhold taxes at a flat 22% rate for bonuses less than $1 million (when it increases to 37%).
The aggregate method is when your employer groups the bonus with your standard salary. Then, your tax withholding is calculated as if the entire amount is a normal paycheck, which could be more or less than an effective 22% rate.
If you’re a high earner, it’ll likely be more than 22%, which means you take home less using the aggregate method. But again, you’ll settle up by April 15 of the next year.
4 smart moves for your bonus money
Now that we have the semi-boring tax intricacies out of the way, it’s time to start thinking about what to do with the $100k bonus, or ~$78k after Uncle Sam takes his cut.
Some of us would prefer a custom Rolex while others might want to pay off their parents’ mortgage (no moral judgment here). But here are some prudent—I say that loosely—ideas for how to spend your bonus.
Pay off your high-interest debt
This one’s purely pragmatic. You might have some lingering student loans, or maybe even a mortgage where the interest costs are not insurmountable. But we’re not talking about this: We’re talking about credit cards, unsecured personal lines of credit, or anything with a >10% interest rate. Pay that s*** off immediately.
Think about it: If you dumped your money into the stock market, you could expect an average annual return of 8-10% pre-tax over the long term. However, if you wipe out your 15% credit card debt, that’s an instant, risk-free 15% annualized saving.
Max out your retirement accounts
It goes without saying that one of the best ways to shield your income from taxes is shaking what your mama government gave you. So long as you haven’t already maxed out your 401(k), your employer should allow you to contribute a portion of your bonus to retirement.
Furthermore, the taxes on the investment gains within the 401(k) are deferred until retirement, which gives a long runway for your money to compound.
Within your account, you can make any investment decision you like. You can outsource to a financial advisor, dump everything into an index fund, or channel your inner Warren Buffett and make individual stock picks—well, if you’re not an investment banker with trading restrictions.
Save or spend on smart assets
At the end of the day, especially in a cyclical industry like investment banking, you need to save up a solid savings cushion in case you: a) get fired b) want to switch up your job, or c) simply need a break. You’ll sleep a lot more soundly knowing that you have some savings that you can fall back on.
One of the largest traps that many working professionals fall into is that even though their income level increases rapidly, their expenses also increase proportionately, leaving no excess savings. Do yourself a favor and pay yourself first.
This doesn’t mean you need to hoard all $100k in a briefcase under your bed. You can still make purchases in smart assets—things that hold their value over time:
- Jewelry
- High-end watches (I’m really letting you justify spending $50,000 on a watch)
- Vintage wine
- Fine art
- Classic automobiles
- Real estate
Just splurge
You’ve worked hard, and sometimes you deserve to just splurge without thinking of the smart thing to do. You can upgrade your wardrobe, plan an adventurous vacation, get unlimited bottle service at the club—anything your hardworking heart desires.
Keep in mind that you can still be smart while splurging. The best way to do this is by utilizing a good credit card that has significant rewards.
TLDR: There is no “best” use of a 6-figure bonus
Again, the “best” use of a 6-figure bonus will always depend on the person who earned it. But if you’re shielding your income from taxes, buying income-producing or stable assets, or enjoying yourself—you’re doing the right thing.
