For many Americans, tax and bonus seasons can mean a little extra money in their pockets. In fact, about 80 percent of taxpayers receive a Federal refund, according to the IRS, and nearly a third of American workers were expecting to receive a year-end or holiday bonus in 2015.
If you are among those who saw a bump in your paycheck around the holidays or expect a tax refund, being thoughtful about how to allocate the extra cash across your debts, investments, savings and splurges can not only better position your finances for 2016, but well into the future. There really is no one-size-fits-all approach to managing your money, but the following strategies can be helpful as you consider your personal financial portfolio.
Set aside a portion for state and local taxes.
Most Americans can expect their bonus to be taxed at a 25 percent rate, plus any state or local taxes. Understanding how this amount will be accounted for, whether through employer withholding or in your end-of-year tax bill, will help determine how much net funds you actually have to work with. And remember, getting tax money back from the federal government doesn't mean you won't owe to state or local jurisdictions, so set aside enough to cover any of these deductions from your windfall.
Have outstanding debt? Pay it down!
Decreasing your debt burden by paying down student loans, credit cards, personal loans and mortgages can be an incredibly satisfying way to use at least some of your newfound money. Consider prioritizing higher interest obligations first, which will save you money in the long-term.
Jumpstart your savings (and keep saving).
A recent Bankrate survey found that 63 percent of Americans couldn't afford $500 in unexpected expenses. Establishing and consistently contributing to an emergency savings fund may seem challenging at first, but setting up automatic transfers can help you develop a routine.
If you do not have an emergency account or rainy day fund yet, consider using your bonus or refund to jumpstart the process. One easy and often overlooked way to make your money work a little harder for you is to review the interest your account is generating. By putting some of your extra cash in the bank, you may be able to increase your account balance enough to qualify for a higher rate. Even a small increase can make a difference over time.
Save for retirement.
Depending on the size of your financial boon, you may want to invest for retirement. If you are under the age of 50, annual contributions max out at $18,000 for a 401(k) and $5,500 across all IRAs. For individuals over the age of 50, the opportunity may be available to add more to both 401(k) plans and IRAs, increasing the maximum to $24,000 and $6,500, respectively. If you're in a position to invest, adding the extra funds could be a very wise move.
While these tips can apply to many people, it's important to find an approach to saving, spending or some combination that works for you. Whichever path you take, remember to enjoy some of your bonus or tax return, too - you earned it!