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How Would You Spend a Raise or Bonus?

How Would You Spend a Raise or Bonus?

By Kim Lankford, Monster Contributing Writer

2. “I wouldn’t do any of the listed choices. I would continue to pay bills off as much as possible. I’m very much in debt and am anxious to get out of this financial pitfall.”

With high interest rates and a big balance, it’s easy to pay thousands of dollars in credit-card interest that gets you nothing in return. If you have $4,000 in credit-card debt with an 18 percent interest rate, you can save more than $5,600 by paying the full balance now rather than continuing to pay the minimum.

3. “I would bank the difference into my retirement savings and continue to live on my earnings prior to the surge in my salary.”

With a raise or bonus, you’re not used to having the extra money, so you can put it to good use before you even realize it’s there. First, invest at least enough in your 401k to get your full employer match, which is free money. It’s tough to beat a 100 percent return. Since 401k contributions are deducted from your income before taxes, your contributions don’t lower your paycheck nearly as much as you’d expect. If you’re in the 25 percent tax bracket and contribute $500 to your 401k every month, for example, your paycheck will only shrink by $375. Most people can contribute up to $16,500 to a 401k in 2009 or $22,000 if 50 or older. The money grows tax-deferred until you withdraw it in retirement (you’ll pay a penalty for withdrawals before age 59 ½).

Or invest the money in a Roth IRA, which doesn’t lower your tax bill now but provides tax-free money in retirement. For 2008 returns, the maximum Roth IRA contribution is $5,000 (or up to $6,000 if 50 or older). Contributing $416.66 per month adds up to the $5,000 maximum by the end of the year. You have until April 15, 2009, to make your 2008 contribution to a Roth IRA.

4. “After a four-month unemployed stint, replenishment of spent monies is the first thing on my mind. I might spend a small amount on a wardrobe or improvements, but all in all, it’s ending up in my savings.”

It’s a good idea to keep enough money to cover three to six months of living expenses in a fairly liquid, high interest-bearing account — like an online savings account or money-market account — so it can earn some interest and be withdrawn without penalty but isn’t too easy to access.

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