Rich Girl Roundup: What Should I Do with My Bonus?

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Rich Girl Elyssa asks, "What should I do with a year-end bonus?" Katie and Henah chat through the two buckets of bonuses: expected (as part of your total compensation) or unexpected (when you've gone above and beyond)—and how they'd handle each.

Welcome back to #RichGirlRoundup, Money with Katie's weekly segment where Katie and MWK's Executive Producer Henah answer your burning money questions. Each month, we'll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Transcript

Transcript

Katie:

Welcome back, Rich Girls and Boys to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and every Monday morning we discuss a relevant money topic a little more casually than we do in our Wednesday deep dives. Here's a quick message from the sponsors of this segment before we get into it.

This week's upcoming main episode is about my experience being alcohol free for over a year. And at first you might think, but Katie, what does that have to do with money? But the experience has been surprisingly illuminating and my takeaways have had a lot of financial applications. Alright, onto the roundup. Henah, how are we doing today?

Henah:

I'm good. It's bonus week here at Morning Brew and Money with Katie, which is very fitting. So this week's question came from Rich Girl Elyssa, what should I do with a year end bonus? Should I still apply the same savings/debt/fun ratio I used for my standard pay? Or what are the other factors that should determine what it's used for? So Katie, I believe you have a fun fact you'd like to start us off with.

Katie:

Yes, I do have a fun fact. Always have a fun fact about bonuses. There is a widely held misconception that your bonus is taxed more than your regular income. Now, this is partially true, partially false because depending on how your bonus is paid out, whether as a standalone bonus check or if it gets lumped into your regular payroll, your bonus might have a flat withholding rate that's higher than you're accustomed to, I believe 22%. But that doesn't actually mean you're paying more in taxes on it. It's just that more is going to be withheld upfront. So you may see some of that coming back to you as a refund in April, depending on how the rest of your taxes shake out. But I always think that that's a fun one because I hear that a lot surprisingly, that like, oh, bonuses are taxed at such a higher rate, but it's not true. There's, there's still wages, so they're taxed like wages.

Henah:

Got you. Okay. That's really helpful to know for when my bonus comes in this week. So to me, I feel like I can answer this question, do you see your bonus as part of your total compensation and budget planning for the year? Or do you perceive this as truly unexpected money? And I feel like Katie, that would be within the vein that you would also recommend. So what do you think about your personal protocol for how you would handle a bonus?

Katie:

Yes, I agree. I think bonuses, there are a couple of different things. So bonuses that I'm expecting or that I consider part of my total compensation is I conceive of it at the beginning of the year. So let's say I know that, oh, I typically get a 20% bonus. If I know that coming, I would tend to spend 10% of the gross value guilt-free, then save the rest. Whereas if it's an unexpected amount that comes from doing an extra project or taking on extra work, for example, I had a book advance that was extra work that was not part of my expected compensation and I used part of it to buy a car.

So for those types of amounts that are unexpected or really special we'll say, I think that I would be more inclined to apply some of it to a splurge, but I always will save some of it. I don't think I've ever or would ever just blow the entire thing on party and bullshit, but that's just me. What about you?

Henah:

I agree. I think that I generally like to save part of it, so I feel like I'm doing the responsible thing before I go enjoy something. So I think you remember we talked about this a little bit back in the summer, I got a midyear bonus, which was really nice. I wasn't expecting that at the outset. I used part of it to buy a Chanel bag that I had always wanted and I had waited a long time to buy, and that felt like a very worthwhile milestone. Then I also had saved a sizable amount, I think one or $2,000 towards a 401(k). So it felt like I was doing both the responsible and the splurgy thing.

But I agree with you that generally if I know that it's coming, so for the year end bonus that is kind of part of our regular compensation, I usually apply the same savings debt fund ratio that I would for standard pay with the caveat, I guess two caveats. One is if I had really high interest debt, I'd probably prioritize making a dent in that, especially if the amount that I'm going to net after taxes is really sizable and could make a big dent in the overall amount, or if I've hit my financial goals for the year, then I'd probably feel a little bit more likely to splurge a little. What do you think?

Katie:

Yeah, I'm glad you said that. I think that brings up something else here, which is I think generally it depends on where you are in your financial journey. So if you're just starting out, I would probably say go use that bonus to supercharge some progress, either making one big one-time contribution to the investment account or knocking out a sizable portion of debt. Use it to do something that's going to drive you forward in some way. Whereas to your point, if you have already met your financial goals for the year, if hey, even at a high level, you're already at Coast FI, so that means you would not actually have to invest another dollar to be retirement ready, come age 59 and a half, then I would be a lot more liberal probably with how I treat extra income.

Henah:

Yeah. How do you calculate Coast FI for people who are curious?

Katie:

Yeah, so Coast FI, the easiest way to check is plug your current invested assets. If you are 30 years old and you have a hundred thousand dollars invested, plug that into a compounding returns calculator and then assume six or 7%, we'll say annual returns and then plug in the number of years until your desired retirement date. So you're effectively trying to figure out what is the money that I've already invested going to grow to by the time I'm going to retire, and see then what that spits out. Take 4% of that number and go, is that enough to live on based on my desired lifestyle? And you can ignore inflation because you're using a lower rate of return at six or 7%. But if for example, you have enough invested such that you plug it in 40, 35 years down the line and it's like, oh, that's going to end up being $2 million bucks and that's $80K in today's dollars, and I assume my retirement lifestyle is going to cost $60k. Okay, cool. Even if I didn't invest another dollar, I have already done enough. And so I think you can be a little bit more loosey goosey with bonus income. Does that make sense?

Henah:

Yeah, yeah, absolutely. That makes sense. I think that's a great point. I also guess I would love to know your thoughts on, so say across the company, everybody gets a flat bonus versus a performance based bonus or something that was a really tough year. Do you feel a little bit differently about that and feeling like, okay, you feel like you've earned it a little bit more or you feel like I've worked so hard towards this, I'm going to go enjoy it a little bit more?

Katie:

I think that would probably be a point in the category of leaning more toward the splurge, but I also, I think in general, that to me would probably end up being more in that truly unexpected. If it was something that was performance-based that you earned over and above and beyond what you were expecting, then to me that kind of falls into that category of like, okay, it was potentially more unexpected and you might be a little bit more liberal with it, especially because I kind of like the idea of celebrating those milestones. I just think there's a nice balance to strike between celebrating them but also not, I don't want to use the word blowing it, but can you celebrate it by also doing something for future you too, so that you're not having to continue to work 20 years down the line.

Henah:

Yeah, that makes sense. And then I think we got some interesting emails and questions recently that we thought we'd introduce a new little segment about. So do you want to explain what our new ask is?

Katie:

Yes. Okay. So my last ask for this episode is we were inspired by some of the more hilarious questions that we received for this next round of Rich Girl Roundup. We want to hear your craziest money stories, so wild things that you have witnessed your rich neighbor do, bad behavior you've observed, maybe you name it. Basically send us the financial tea or otherwise interesting anecdotes, and we will obviously keep things anonymized, but we're going to start trying to include some of the more interesting tales in Rich Girl Roundup. To be honest, my identity theft story is kind of a perfect example of this.

Henah:

Yeah. It also reminds me of the story we talked about a few weeks ago for hosting on a budget in that Rich Girl Roundup where a woman was attending Thanksgiving across the country, and then days before she was going to leave, she received a spreadsheet from her host asking her what meal she was going to bring, and she was like, I'm traveling across the country.

Katie:

Yeah, exactly. Just kind of the ridiculousness that we all experience in daily life. I think in some ways the questions that we receive are often inspired by things like that. Like, oh, how do I handle a situation where this happens? But I don't know. I just think it would be fun. So if you have any wild money tales to tell, hit us up. We'll just have you email moneywithkatie@morningbrew.com and you can tell us your craziest stories. And like I said, we'll keep everything anonymous. But that is all for this week's Rich Girl Roundup, and I'll see you on Wednesday to reflect on a year plus of sobriety.