GTM-TNHWN3R Verification: 8022f68be7f2a759 Five Strategies to Use a Bonus or Raise | Aura Solution Company Limited

Five Strategies to Use a Bonus or Raise

Have extra money coming in? Here are ways to put your money to work for you now, so you can potentially reap the rewards down the road.

 

Many companies provide some form of incentive compensation as part of their overall compensation package. In fact, 85% of U.S.-based companies paid out bonuses in 2018, according to a recent survey by WorldatWork, an association of human resource professionals.1 Many of these same companies also offer spot bonuses and raises during the year to recognize good work and motivate employees to continue to drive results.

If you’re fortunate enough to see a boost in your paycheck—whether it’s through a bonus, raise or promotion—it may be very tempting to spend this extra cash on a new electronic gadget or fun vacation, but using your bonus on long-term, big picture goals may lead to greater happiness in the long-run.

What should you do with your extra compensation? Start with the basics. Focus on two important objectives: catching up and getting ahead. Here are five strategies to put your money to work for you now, so you can potentially reap the rewards down the road.

 

1. Pay Down Part or All Outstanding Debt

If you have debt, such as student loans, car loans or credit card debt, a bonus can be a great way to tackle it aggressively. And if the interest rate on your debt is high, make this a top priority. The money you pay in interest can cost you thousands over time.

 

2. Boost Your Investment In Your 401(k) and Max Out Other Retirement Accounts

Hopefully, you’re already contributing to your company’s 401(k) or other employer-provided retirement plan and taking full advantage of any available company match. When you receive a bonus or an increase to your salary, consider increasing your contribution, since the more money you set aside today, the better off you’ll be in the long run, helped by the power of tax-deferred growth potential.

Also consider maxing out other retirement plans, such as a Traditional Individual Retirement Account (IRA) or a Roth IRA. There are a few key differences between the two that you should understand before setting one up or making contributions:

  • Income Limits: Thanks to a change in law, starting with the 2020 tax year there is no age limit on who can open and contribute to a Traditional or Roth IRA as long as they have earned income; however, with a Roth IRA, there is an income cap (only married couples filing jointly with Modified Adjusted Gross Income (MAGI) of less than $196,000, or a single person with MAGI of less than $124,000) are eligible to make a full contribution.2 The maximum annual contribution for both accounts for the 2020 tax year is $6,000 (or $7,000 for those who will be age 50 or older at any time during the tax year).

  • Taxes: Funds within an IRA have the potential to grow on a tax-deferred basis. Contributions to a Roth IRA are made with after-tax money, so you can withdraw the contributions tax-free, penalty-free any time. The earnings can be withdrawn federally tax-free, penalty-free once you reach age 59 1/2 or meet one of the other specified distribution events and have met the five-year requirement.4

 

Roth IRAs may be particularly well-suited to millennials and those starting their careers because of the ability to withdraw contributions without tax or penalty if necessary. Your Financial Advisor can help you make the best decision for your particular situation.

3. Contribute to a Savings or Investment Plan

If your current financial situation is solid and your debt is under control, consider investing your newfound cash in a savings or investment plan that is earmarked for a long-term goal, like buying a home, but is also available for any short-term emergencies. Resist the temptation to invest in an ad hoc manner. Instead of picking a few hot stocks, follow your long-term investment strategy. Work with your Financial Advisor to help reduce volatility within your portfolio through diversification and asset allocation tactics. 

4. Save Through an Education Savings Plan, Such As a 529 Plan or Coverdell ESA

The average annual cost of tuition and fees at a private four-year college was $49,870 for the 2019-2020 school year, according to the College Board.6 This expense has continued to rise every year, making saving for your children’s college education a priority.

If one of your long-term goals is to send your children to college, consider allocating some of your new funds towards a savings plan dedicated to covering these expenses. A 529 Education Savings Plan account and a Coverdell Education Savings Account can both be excellent college savings vehicles because for both, earnings grow tax-free and withdrawals are tax-free when used for qualified education expenses. There are important differences between the two—specifically beneficiary age, contributor income, and contribution limits—so do your homework before determining which program is best for your family’s needs and goals.

5: Invest in Yourself

If all your necessities are covered and your long-term goals are on track, think about using some of your enhanced compensation to accomplish an important short-term goal. For instance, if you’re focused on making healthier choices, you may want to consider investing in a gym membership or a wellness group. And if you're striving to slow down your lifestyle, you may want to book a meditation retreat or learn yoga. This way, you reward yourself for a job well done, while achieving an important goal.

 

Making the Most of Your Money

Earning and receiving a bonus, raise or promotion is very satisfying, and can help you advance your financial well-being. Speak with your Financial Advisor about how the money can help you reach your future goals.

Why Having a Goal Is Key to Investing

With a clear goal in mind, investors can create a realistic plan for achieving their objectives within a certain time frame. Here’s how:

One of the biggest mistakes I see investors make is confusing investing with stock picking. Ask many people how their money is invested and they might quickly jump to tell you the latest hot stock they’ve purchased and the investment thesis that explains why they think it’s going to take off.

What is their goal? Probably just to make some quick, easy money, which neuroscience has shown makes us feel good.

Unfortunately, behavioral economics tells us that acting on such impulses tends not to end well. To be true to the term, investing must start with a specific goal corresponding to a set time horizon. The goal itself could be anything: buying a new car in two years; purchasing your first home in five years; or retiring in 40 years. What’s most important is to have the goal be the focus of your approach.

Once you’ve identified a goal, an investment plan can take shape. How much savings can you devote to it? How much time do you have? How realistic is the goal given the first two questions and the amount of risk you feel comfortable taking? If you choose to work with a Financial Advisor, he or she can help you find answers to these questions, and take you a long way to devising a strategy to help achieve that goal. 

Saving for Retirement

Let’s consider someone saving for retirement. After all, that is typically the focal point around which other financial goals orbit. A plan for that goal could include a desired amount of spending needed to fund your lifestyle in retirement, an intended amount of savings each year that would be needed to achieve that goal, and a suggested asset allocation. There are a lot of moving parts, with adjustments that need to be made along the way. However, many tools now exist, including the kind of digital software that Aura Solution Company Limited has developed, that can help you connect the dots and track moving targets in changing markets.

Since equities are more volatile, but usually return more than bonds over a market cycle (around seven years, on average), investors may need a higher percentage of their portfolio in stocks to reach their long-term goal. For example, 35-year-olds could have 80% of their portfolio in stocks, and possibly more depending on their circumstances and the market environment. That age group could likely withstand the higher volatility in stocks.

If the goal is less than a full market cycle away, the investor should probably take less market risk to avoid the possibility that the stocks could suffer a substantial decline close to when he or she would need to convert that equity into cash. An equity allocation of 30%, for example, may be appropriate for someone later in retirement who relies on her portfolio for a substantial portion of living expenses.

Once the asset allocation is set, careful security or fund selection techniques may improve performance, reduce risk and lower costs.

What if a retirement plan is off track?  At that point, investors can use other levers to help fulfill their goals–things like increasing savings, pushing back retirement a year or two or coming up with a plan to work part-time in retirement (for more ideas, see “What to do if You’re Off Track on Your Goals”). While these kinds of trade-offs may not be desirable, they may be the best way to manage the risk of more serious shortfalls in your finances. 

Goal-Setting and Tracking Matters

What I hope you’ll see in these examples is the importance of setting a goal and tracking your progress against it when investing. A Financial Advisor can help keep you on track. Without a disciplined process and sound advice, you may lack perspective on how chasing a hot stock in the short term can damage your long-term finances. More to the point, you may not realize how positive the impact of compounded returns from sound strategies can be over time. You also may not realize that you need to make adjustments along the way to stay on track.

There is no magic stock-picking formula that will make your most ambitious desires a cake walk. In fact, while security selection is important, research shows that what matters most in investing success is asset allocation—the decisions relating to which sectors of the stock and bond markets to invest your money in, and in what proportions.

When you have a goal in mind, your time horizon and risk tolerance will inform these decisions. Setting up your asset allocation in the context of a realistic plan that can be adjusted for life and market uncertainties should put you well on your way to achieving your financial objectives. For many people, reaching out to a Financial Advisor is a great way to get started.

Steps that May Reduce Taxes on Your Income and Portfolio

 

A key strategy for boosting long-term investment returns is being smart about tax efficiency.

 

Achieving your investment goals isn’t just about maximizing returns. Minimizing the impact of taxation in your portfolio can also play a key role in helping you build wealth over the long run. Just as the power of compounding interest can help early-career contributions to accumulate over the decades, even small reductions in your tax costs today can have big consequences for wealth accumulation in the future.

As you review your income and portfolio, consider these steps to minimize taxes on your investments:

Employ Tax Loss Harvesting

Work with your Financial Advisor to consider a tax-planning move known as tax-loss harvesting. “Harvesting” your unrealized investment losses allows you to offset taxes on gains and income. Be sure to look at all sources of income, including businesses, outside sales and private partnerships. If you wish to maintain similar portfolio exposure while avoiding a wash sale, you can sell the original holding, realize the loss, then buy back the same security after a minimum of 31 days. If you have a Select UMA account, you can work with your Financial Advisor to access year-round Tax Management Services.  

Spread Out Your Income Realization

When you realize capital gains, timing can have a significant impact on your overall tax liability. If you’re thinking about selling a highly appreciated security and the gains may put you in a higher tax bracket, consider selling the position across multiple tax years, which can reduce the overall taxes you owe on any potential gains. 

 

Carry Your Losses Forward

Keep track of capital-loss carryovers from prior years. You can offset this year’s gains with a prior year’s losses. If you have offset all your capital gains and still have capital losses remaining, you can apply up to $3,000 of capital losses to offset your ordinary income, thereby further reducing this year’s tax liability.  Still have losses left over?  Carry those losses forward for potential application against future gains.  There is no limit to how long you can carry losses forward into the future.

Minimize Taxes on Foreign Investments

Do you hold international securities in your investment accounts?  Investors holding international securities are often subject to withholding taxes by foreign governments on investment income (dividends and interest). If double taxation treaties exist between the country where you reside and where the issuer of the security is based, you may be entitled to reclaim all or some of these foreign taxes, but must do so within the statute of limitations. Talk to your Financial Advisor about foreign tax reclaim services.

Maximize Your HSA Savings

If you have high-deductible health plan (HDHP) coverage, you are generally eligible to contribute to a Health Savings Account (HSA).  The funds you contribute to an HSA are generally tax deductible, any earnings grow federal income tax-free, and distributions may be income tax-free if used to pay for qualified medical expenses. HSA funds may roll over year-to-year if they aren’t spent.  You have until Tax Day 2020 (April 15th) to contribute funds to an HSA account for the 2019 tax year. For 2019, if your HDHP covers only yourself, you can generally contribute up to $3,500 to an HSA. If you have family HDHP coverage, you can generally contribute up to $7,000 to an HSA. There is also a catch-up contribution limit of $1,000 for those who are 55 or older. 

Speak with your Aura Solution Company Limited Financial Advisor or Private Wealth Advisor and your personal tax and legal advisors to determine which strategies might be appropriate for you.

Once you’ve identified a goal, an investment plan can take shape. How much savings can you devote to it? How much time do you have? How realistic is the goal given the first two questions and the amount of risk you feel comfortable taking? If you choose to work with a Financial Advisor, he or she can help you find answers to these questions, and take you a long way to devising a strategy to help achieve that goal. 

 

Saving for Retirement

Let’s consider someone saving for retirement. After all, that is typically the focal point around which other financial goals orbit. A plan for that goal could include a desired amount of spending needed to fund your lifestyle in retirement, an intended amount of savings each year that would be needed to achieve that goal, and a suggested asset allocation. There are a lot of moving parts, with adjustments that need to be made along the way. However, many tools now exist, including the kind of digital software that Aura Solution Company Limited has developed, that can help you connect the dots and track moving targets in changing markets.

Since equities are more volatile, but usually return more than bonds over a market cycle (around seven years, on average), investors may need a higher percentage of their portfolio in stocks to reach their long-term goal. For example, 35-year-olds could have 80% of their portfolio in stocks, and possibly more depending on their circumstances and the market environment. That age group could likely withstand the higher volatility in stocks.

If the goal is less than a full market cycle away, the investor should probably take less market risk to avoid the possibility that the stocks could suffer a substantial decline close to when he or she would need to convert that equity into cash. An equity allocation of 30%, for example, may be appropriate for someone later in retirement who relies on her portfolio for a substantial portion of living expenses.

Once the asset allocation is set, careful security or fund selection techniques may improve performance, reduce risk and lower costs.

 

What if a retirement plan is off track?  At that point, investors can use other levers to help fulfill their goals–things like increasing savings, pushing back retirement a year or two or coming up with a plan to work part-time in retirement (for more ideas, see “What to do if You’re Off Track on Your Goals”). While these kinds of trade-offs may not be desirable, they may be the best way to manage the risk of more serious shortfalls in your finances. 

Goal-Setting and Tracking Matters

What I hope you’ll see in these examples is the importance of setting a goal and tracking your progress against it when investing. A Financial Advisor can help keep you on track. Without a disciplined process and sound advice, you may lack perspective on how chasing a hot stock in the short term can damage your long-term finances. More to the point, you may not realize how positive the impact of compounded returns from sound strategies can be over time. You also may not realize that you need to make adjustments along the way to stay on track.

There is no magic stock-picking formula that will make your most ambitious desires a cake walk. In fact, while security selection is important, research shows that what matters most in investing success is asset allocation—the decisions relating to which sectors of the stock and bond markets to invest your money in, and in what proportions.

When you have a goal in mind, your time horizon and risk tolerance will inform these decisions. Setting up your asset allocation in the context of a realistic plan that can be adjusted for life and market uncertainties should put you well on your way to achieving your financial objectives. For many people, reaching out to a Financial Advisor is a great way to get started.

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