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Large Bonus from Work - How to Spend? (Monthly Budget Included - Long!)
Hello all, DH is getting a very large one-time bonus of $50,000 from work and I'm unsure as to how we should spend it. We have little savings and a decent amount of debt so I don't know whether we should build an e-fund or pay off more debt.
We're both 26, no kids and none planned for at least 3 years. We had a super expensive year with buying a house and getting married. We didn't save enough and had to use our LOCs to pay for some of the wedding, a new pool, and a car port.
DH's car is paid for (2009 Ford Focus) and my car has a loan (2009 Honda Civic SI). We have $2,500 in savings that we only started in January, no CC debt, no investments.
Monthly Budget
Take home pay: $5900
Mtg+tx: $1080
Utilities (hydro/cable/internet/phone): $370
Groceries/Dog food/Supplies: $650
Gas: $500 (DH drives a lot for work)
LOC payments: $1250; we pay a lot above minimum to pay off quickly.
LOC #1 - $17,500 balance - $20,000 limit @ 4.25%
LOC #2 - $8,000 balance - $9,000 limit @ 4.25%
Car payment: $250
Car loan $11,000 balance @5.50%
Savings: $600
Insurance (car, house, life): $335
Spending money (includes hair cuts, clothes, gifts, prescription meds, date nights etc.): $800
Bank fees: $15
So, back to the $50,000 bonus. We have the option to take it all in one paycheck (taxed at 48%, ew), or put it all directly into DH's retirement fund tax-free, or split it by putting some into retirement tax-free and taking some in his pay. We're leaning more towards the third option.
I think a good balance would be putting $15,000 into retirement and taking $35,000 in his pay. This would leave us with about $18,000 net with the $15,000 untouched in his RRSP.
We need $1,000 of this money for immediate spending on summer tires.
The rest of the $17,000 liquid is the debate. I think it should all go to debt, DH thinks we should put half on the debt and half in an e-fund/investments.
DH and I agree that the minimum we should apply to the debt is $8500 so we can roll my car loan onto our LOCs and free up that $250 per month for either savings or to snowball it onto our LOCs. DH wants to put $5,000 in an e-fund and $3,500 into investments. I'm torn between that and just putting the whole $17,000 onto our debt. We could not get an investment that guarantees more than about 3.00% so it would not cover our interest cost.
What would MM do with the bonus? Apply all of the cash portion to debt, or split it up and put some into different types of savings?
Thanks!
Re: Large Bonus from Work - How to Spend? (Monthly Budget Included - Long!)
Thanks for the advice! I know about the RRSP max (I'm in Canada, no 401k for us) and DH can put $25,600 this year based on his tax assessment. Here it's 18% max per year of your yearly salary and you can carry forward unused amounts.
I know our groceries seem high, we're in Quebec and food is pricey here. I see some people on here spending $200-250 per month on groceries and that seems insane to me. We don't really have coupons but I buy lots of things in bulk at Costco. Admittedly though we do like nicer cuts of meat and nice cheeses, plus our budget includes wine too. We love wine.
My prescriptions are about $75 per month, so that's a good chunk of my spending. We like to go out. I'll definitely look this over to see if we can cut!
I am going to ditto this, and add that I believe the max you can contribute to a 401K this year is 17,500 so you would be just under that if you contribute 15K to his retirement from the bonus. I would use all the rest for debt, and consider re-examining your budget money. I know we live in a low cost of living area, but for 2 people we spend about 200-250 on groceries per month, and that includes paper products (sometimes 300 if I'm stocking up on something). I would also cut your miscellaneous spending- you are getting out of debt, so put all that money towards the debt every month and it will pay off much quicker and you will not have to worry about debt again!
I would take it all out and use it to pay off debt!
The tax burden is a lot, but if you can stop having a car payment AND make some progress on your LOCs, that seems like it will get you further ahead in the long run.
I also think taking enough out for your tires/paying off the car, and putting the rest into retirement isn't a bad option.
I think we've decided to put the $15,000 in his retirement and cash out the $35,000.
With that, we'll pay our summer tires and apply the remaining $17,000 to our debt. We'll then up our LOC payment to $1650 per month (snowballing my car payment and cutting down on variable spending) and have the $19,500 balance paid within a year. Yay!
Thanks everyone for your input!
Just a quick question...
Is the $50k he is getting the after tax amount?
Just wondered. I know you live in Canada, so it is different than things here. But, it will be considered a form of income, right? At least here, bonuses like that are taxable. If it is taxable, you may want to set aside some of it for those taxes if the taxes are not automatically deducted from the amount when it is given to him.
Hi,
Yes, it's before tax however they will be deducted at the source so we won't have to pay them later; that's why I calculated spending the $18,200 that will be left over and not the full $35,000. The $15,000 going into his RRSPs will be considered an "employer contribution" to his retirement fund and is not taxable.
Pay off the LOCs and then do not use your house to fund your life!
Cut back on the eating out and clothes and other non essentials to build more savings (along with the money you no longer need to pay on the LOCs - all all of this to savings). Then practice the "Save first - then buy" philosophy when making large purchases.