60-70% of My Income Comes from a Year-End Bonus! (How Do I Invest?)

July 7, 2023

Bonuses are amazing, and in this highlight, we discuss how to invest them properly.

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Next up, we have a question from Cam. We made 60 to 70 percent of our household income as a year-end bonus, so $600k total. Oh wow, right? I know! So, the question is, how should we manage saving 25% throughout the year? And I appreciate that they recognize this as an opportunity and they want to do things right. So, what do you think? I love it! Alright, Brian, so I’m going to… I don’t do public math, so I’m going to talk slowly while I put this in here. $600,000, right? And so, they’re saying like 40 percent of that amount is what they get paid throughout the course of the year. I’m just doing kind of loose thinking on that. It’s really hard because a lot of our clients fall in this category, right? They earn a salary, but they might get a big bonus or maybe some of their compensation comes in RSUs that vest annually, and so it really bumps their income out. So, even though they show an income of $600,000, it doesn’t really feel like they’re making $600,000 because that’s not what they’re making on a monthly basis, month over month. And so, the savings does get a little nuanced. I’m going to tell you what people do that do it wrong, and then Brian, I want you to talk about, okay, what’s a better way to think about this? I’m so amazed when I tell someone, you know, they become a client, like, “Hey, or they ask me a question just in the community, ‘Hey, how should I save?’ Oh, you ought to think about doing the foo and follow this food for you and you ought to do this. Like, okay, well, based on my cash flow, I can max out my 401(k). Great, that’s awesome, dude. I’m max, I’m a 401(k), maximum Roth IRA.” And they go the whole year doing that, and then the big bonus hits, and in their mind, “No, no, maximum 401(k) and max out my IRA. I’m done. I’m going to go to the pool, I’m going to go to the car, I’m going to go do the thing. I’m going to go expand that.” And they are because for 11 out of 12 months of the year, they make one income. That’s the type of saver they are. I’d argue that a financial mutant has to do that differently. They have to think about it differently to do it well. Yeah, this is… I’m going to let you see behind the curtain of kind of what a financial planner does for a client because you have multiple components going on here. First of all, you could take… because somebody who has, yes, if 40, say it’s like a quarter of a million dollars. Now, these are big numbers, by the way, so we could pull this down to where the average American is, but we’re going to go with what Cam shared with us. So, if base salary is $250,000, the simple thing a lot of people would think you would do is just multiply that by 25, base your monthly investments, and then when you get the big lump sum bonus at the end of the year, I mean, at the end of the month, you just do 25 percent of that. Easy peasy. You’re in, you’re out, you’re done. No, it doesn’t work that way, unfortunately, because, you know, that’s the simple path, but that’s not the correct path. It’s because a lot of times when people have this, this is not unusual for us with IT people we work with and other people who get employee options as executives, is that you might have a spread. You know, this person doesn’t just make $250,000, and then they have this one-time now they make $600,000. More than likely, this person makes between $400,000 to $600,000 every year, and you could bring this down to a normal level, but if it was $400,000 to $600,000, I bet their lifestyle is bigger than somebody who just has a base salary of $250,000 a year. So you have to take that into account. So you first have to do a full cash flow analysis, do a budget. I know it’s boring, I know it’s not the most sexy and exciting thing, you gotta do it. You gotta know where all the money is going, not only on a monthly basis, but how about the one-off stuff? How about when you have to make your property tax payment? When you have to pay all your homeowners’ insurance? When you have to pay all your life insurance premiums? All the… you know, going on your family vacation, you got the holidays and the Christmas, put all that stuff on paper so we actually see. This is first of all, you are going to take what you anticipated total income is and multiply it by 25. You don’t get to pass go on that. You make an anticipation of what your income is going to be multiplied by 25. That’s the goal. That’s what we’re going to try to reach on the savings and investment side of things. Now we back into how we’re going to do it. You can’t… you know, once we figure out that the one-off stuff is going to mess it up, mess us up, so we can’t just take 25% off of the quarter of a million. We might say, “Hey, instead of doing 25 off this, why don’t we set up to where we’re doing like two grand a month here?” And, you know, because I can do that every month without trouble, it still leaves enough money in my cash and my budget to pay the one-off stuff, the vacations, the property taxes, the insurance, and all the other things that I have to pay. But then now, when that bonus hits, I can coordinate how much that’s going to come get funded into the after-tax accounts to catch me up on the 25% there, how much is going to go into the profit sharing, how much is going to the retirement plan. There is a plan in place for every dollar that comes in. It’s just… But instead of doing it as a simple set it and forget it once a month, you just go take a little more coordination. It’s going to take a little bit more planning. And this, once again, ties back into the fact you can try to create your life as simple as possible. I would encourage you to do it. That’s why we give away all this free information. But as you have more and more success, you’re going to find even what should be simple, like trying to figure out how do you save 25% of your income, because your income is so complicated. It’s multi-faceted. You need somebody to help you navigate this so you don’t screw it up from a tax standpoint, so you don’t overfund your retirement in the first quarter or first half of the year so you miss out on profit sharing and matching on the back side of this, that you’re not screwing up the Deferred Comp. Because I guarantee you, somebody who has this type of bonus structure, if they’re a cog in the will, there’s a Deferred Comp. There’s a cash balance plan. There’s some other level of incentives here that you better know how to maximize it and not screw it up. Because like I had a phone call yesterday, great prospect, tremendously successful, owned his own company, and now has been bought out and has this big windfall coming his way. But it’s still, after I got a call, I was sad for him because when he told me what the profit and the income of his company had been for the last five years to garner such a big purchase price, I was like, “What type of retirement plan did y’all have?” He had no retirement plan. He’s like, “I just didn’t know anything about that stuff, so I just didn’t do it.” Guys, do you realize somebody who’s pulling in that much money income, the government encourages you because they want you to pay your employees, they want you incentivize your employees, and they want you to save for yourself. We could have legally helped them save and invest and lower their taxes by hundreds of thousands of dollars. That stuff don’t be too prideful. If you need help, ask for help. Get somebody so it’s not your first time and you’re winging it and you’re trying to figure it out. So that you’ll be great at giving advice to your employees and your peers and others when you’re doing experience shares. Why not have somebody who’s already been through it so they can give you the experience shares and you can be the net beneficiary? I’m going to throw one little, just one little… Can I do one more thing? Just on this. Don’t… Don’t be what we call a Clark Griswold, right? Don’t start spending the bonus before it shows up because we see people all the time who… They get, they know they’re going to get this bonus and in their mental accounting head, that bonus is going to pay for the vacation. And, but then, “Oh, well, I’m going to get the bonus. That’s going to help us redo the kitchen.” Well, and then, “Well, I’m getting the bonus. Let’s come pay for the car.” And all of a sudden, you’ve spent that bonus like three times over. It hits, you’re like, “Oh, man. I guess I’m not going to save as much as I thought.” And then you get the tax bill. Make sure that you’re disciplined enough to not allow yourself to fall into that trap. That one sucks. And we’ve seen that way too many times. The big thing is, you’re trying to make the good behaviors easy. That’s why you do try to automate as much as your life, and you’re trying to make the bad behaviors hard. And so, that’s why I do like force scarcity, where you’re squeezing yourself to try to say, even invest as much as you potentially can without, you know, make it almost hurt so that you don’t let your lifestyle creep beyond what your goals and your income say that you should be doing for the future.



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