10 Smart Ways to Invest Your Bonus for Future Income  

If you’re smart, you don’t consider your yearly bonus check as part of your monthly or annual income, you think of it as an actual bonus, and, instead of using it to pay bills, you use it as a tool to invest in your future. The most common investment for professionals is your 401(k) account with your employer, which is a monthly deduction from your paycheck (pre-tax) into an investment account that you can deduct money from at a later date, once you reach retirement age (which is then taxed). Most employers match 3-6% of your monthly contributions, so it’s important to know what your monthly contributions are and that you’re maximizing your benefits with your 401(k) before you make any additional investments. Once you feel confident with your 401(k) plan, there are a number of other ways to invest for your future. The average return rate for most standard investments is 8-10%. That means if you invest $1,000 it will take up to twelve years to turn that into $2,000. Which might seem like a long-time, but the more money you invest and the more frequent you invest, the greater the return will be.

We’ve pulled together a list of ways to invest for your future that are incremental to your 401(k) plan and are perfect for investing your yearly bonus or even your tax refund.

Pay off High-Interest Debt
Paying off your high-interest credit card debts should be the first priority. You’re spending more on the high-interest rates than any return from an investment would. And the overall cost of that debt will reduce the faster you can pay off your credit cards. Once you’ve paid off all credit card debt, always pay the monthly balance in-full every month before you spend money on incremental expenses. 

Continue to Invest for Retirement with a Roth IRA
Once you’ve maxed out your 401(k) investments, you can put money towards a tax-friendly account like a Roth IRA. An IRA is an individual retirement account, similar to your 401(k), which you open on your own that has tax-deferred or tax-free investment growth. A Roth IRA is a modified individual retirement account, where you can invest up to $5,500 annually of your after-tax income (individuals who are 50+ can invest up to $6,500). The income you earn on this account is tax-free, and you can make withdrawals after the age of 60. This account is preferred and different from other investment accounts because of its tax-free status. 

Build a Rainy Day Fund
A rainy day savings fund is a savings account of money set aside for an emergency. For example, if you lose your job or another emergency happens that requires a large sum of money like your AC Unit breaks, a pipe bursts in your house, unplanned medical expenses, etc. Investing in a rainy day savings fund will help make you feel secure if something were to happen and you will avoid potential short-term debt in the future. Ideally, you’ll want to put enough money in your emergency funds to cover six to nine months of your necessary expenses (rent, food, utilities, loan payments, etc.).

Save for a Large Future Purchase
If you’re planning a large purchase in the next couple of years like a new car or a house, then it’s important to put money aside in a savings account in advance to plan for large purchases down the road. Usually, when you purchase a home or a new car it’s customary (in order to secure a loan and get a good interest rate) to put 10-20% down for the purchase. It’s also a good idea to separate your rainy day funds and your large purchase funds, so consider opening a second savings account dedicated to a large future purchase that you can commit to adding money to every bonus season and even a small amount every paycheck.

Bonds and Treasury Securities
One of the most low-risk ways to invest your bonus dollars is by investing in Treasury Securities, which are investments issued by the U.S. Government, so you’d be lending money to the government and they pay you interest on your loan. There are three types of U.S. Treasury Securities that you can invest in: 1. Treasury Bills, which are short-term and usually paid back within a year, 2. Treasury Notes, which mature in 2, 3, 5, 7, or 10 years and pay interest every six months, and 3. Treasury Bonds, which mature in 30 years and also pay interest every six months. U.S. Treasury bonds don’t have a high return rate, but it’s higher than your savings account and the funds are off limits for a number of years. You can purchase Treasury Securities directly through the U.S. Treasury at Treasury Direct. 

Certificates Of Deposit
Certificates of Deposits (CDs) are similar to Treasury bonds in that they’re a relatively low risk, have a fixed interest rate, and they restrict access to your funds with a maturity date. CDs are offered by banks in a similar fashion to bonds. You agree to lend your bank money for a set period of time, and they will pay you a flat interest rate on the loan. You can purchase CDs through your bank or through a brokerage firm (typically the investment firm you use) who works with banks and credit unions to sell CDs. 

Real Estate
Real estate is a common way to invest incremental funds and typically a great investment for the future. Investing in rental properties, residential real estate to flip or commercial real estate are all great areas to consider investing in. Historically, you’d need a significant amount of money to start investing in real estate, since you’d typically be required to put 10-20% down, but there are new crowdfunding real estate platforms that allow individuals to invest in different real estate properties for partial ownership with a small investment amount.  Realtyshares and Fundrise are two of the most popular but do your homework before using any platform to compare prices and offerings and also make sure to do a significant amount of research before investing any money.

Lending Money to Others
Another popular way to invest, but typically riskier than investing in real estate, is to lend money to others. If you have a large sum of money ($20K-$100K+), then you might want to consider a direct personal loan with a structured interest rate and payment schedule (you can set something up easily using forms and a consultation through LegalZoom), if you have a smaller amount to invest $1K-$5K or would feel more comfortable using a platform to manage your loan, then there are peer-to-peer lending platforms that you can use. Prosper and Lending Club are two to consider, but as previously noted, do your homework on platform offerings and potential investments.

Collectibles
If you have an interest in art or antiques, then investing in collectibles might be of interest. This is a very risky way to invest compared to the other recommendations on this list, but it nicely pairs interests and hobbies with investing. You’ll need to do extensive research on the type of collectible you’re interested in investing in and be careful of scams or fraudulent items. Also, be mindful that investing in collectibles might take a significant amount of time before you can sell the item for a return, so it’s best to invest in collectibles you plan to enjoy for a longtime and/or pass down to your relatives.

Invest in Professional Development
Investing in professional development is a great way to invest in your future. Going back to school for higher-education courses, advanced degrees, and specialized training (like an MBA, a Doctorate, training Certificates, etc.), can help with your future worth to employers. It might also help with future promotions and new job prospects. Most successful professionals will tell you to “Never stop learning,” so invest in your future through ongoing professional development.