Receiving a bonus from your employer can help you get closer to achieving your financial goals. If those goals include both buying a house and saving for retirement, you might be wondering how you should use your bonus money. Here are some things to consider.
Should You Put Your Bonus Toward a Down Payment?
You might be eager to purchase a home soon because you’re struggling to afford high rent payments, you’re going to start a new job, or you’re expecting a baby. If you have to or want to buy a house in the near future, a well-timed bonus can be just what you need to make that possible.
While putting down 20% or more will let you avoid paying for private mortgage insurance, you can buy a house with a smaller down payment. If you have good credit and a low debt-to-income ratio, you might still qualify for a mortgage with a competitive interest rate.
Should You Use Bonus Money to Fund Your Retirement?
If you’re not in a rush to buy a house and you’re already putting aside money for a down payment each month, you might decide to prioritize retirement. If you put your bonus money into a retirement account, you’ll benefit from compounding. If you contribute to a 401(k) with an employer match, you’ll get an additional benefit.
Putting your bonus toward retirement can be a particularly smart move if you’re getting close to retirement age and you’re concerned that you’re not on track to meet your savings goal. There are limits on the amounts that individuals can contribute to retirement accounts each year, but people 50 and older are allowed to contribute more. Making catch-up contributions can help you reach your goal and have a secure retirement.
When to Use a Bonus for Both a Down Payment and Retirement
You don’t necessarily have to choose between saving for a house and retirement. If you’re relatively young and still have decades to go before you reach retirement age, you might prefer to divide your bonus money between your short-term and long-term goals. You can split the money evenly between a down payment and retirement, or you can prioritize one goal over the other.
Think Carefully About How to Use Your Bonus
Receiving a large sum of money as a bonus is an excellent opportunity to invest in your future. Consider your circumstances, goals, and priorities to figure out which approach will work best for you.
