Invest that windfall well
Experts recommend you give yourself a treat first
By HANK EZELL
Cox News Service
December 25, 2005
Maybe you got some crisp green gifts in your stocking on Christmas morning.
Or perhaps your last paycheck was super-sized, either because you did good work or just because you lasted another year.
For whatever reason, a lot of people are thinking today about their windfalls — extra money, above and beyond the usual claims on their income.
Two choices: You can do good, or you can just have a good time.
This year, a surprising number of very bright financial planners say the first thing is to give yourself a reward.
"You should take 10 percent and just have fun," said Mark DiGiovanni of Marathon Financial Strategies in Snellville. "That would hardly be extravagant, unless of course you're in debt up to your eyeballs."
Indulgence will be easier if some of your new assets are in gift cards good for purchases with individual retailers or restaurants. The average shopper spent $88.03 this year on gift cards, according to the National Retail Federation.
Still, a lot of people got cash gifts. That is, actual greenbacks from aunts, uncles, godparents and grandparents.
There is an outside chance your boss handed out across-the-board bonuses. Only 5 percent of companies gave cash bonuses this year, and the average is $450 — $100 less than last year.
On the other hand, a full 78 percent of organizations offered variable pay programs this year, according to Hewitt Associates, a human resources consultant and provider. For the most part, that means year-end bonuses — rewards because the company did well, you did well, or both.
"Companies are deciding it makes more sense to tie awards and bonuses to performance," said Hewitt spokeswoman Suzanne Zagata-Meraz. "They're trying to tie rewards to whether the company is successful, vs. rewarding you for how long you've been there."
If that's the case, a good time is certainly in order. "You need to reward yourself for whatever you did to earn the money," said DiGiovanni, who is a certified financial planner.
But remember, he said 10 percent for celebrating. Here are ideas for making progress with the other 90 percent:
• Pay off credit cards. The average finance charge for standard cards with variable rates is 13.4 percent, according to Bankrate.com. "Retiring credit card debt at 13 percent is the same as earning a 13 percent return on investments, with no risk," said Greg McBride, Bankrate.com's senior financial analyst.
Charges can go much higher, especially if card issuers decide you are a worrisome borrower. Among the top credit card issuers, the "punitive" rate is pushing above 31 percent, according to cardweb.com.
There is a positive side to paying off expensive credit card loans. "There is a peace-of-mind factor when you don't have that much debt hanging over you," DeGiovanni observed.
• Get ready for rainy days. That means stashing a portion of your windfall in an emergency fund. Counselors usually recommend setting aside enough to pay three to six months of ordinary living expenses.
"I recommend opening a different account, a bank account or money market fund, that is specifically dedicated to saving," said Brian McGlinchey, a certified financial planner with USAA Financial Planning Services. The point is to build a psychological barrier between you and this ready cash, reducing the temptation to use it the next time your car needs repairs.
• Put some money into a Roth individual retirement account. "This is something that people typically put off until the end of the year," said Helga S. Cuthbert, a certified financial planner in Decatur. "That's when we have a lump sum, so we don't have to use regular cash flow to fund it."
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