The United States military spent over $500 million in enlistment and reenlistment bonuses for its Servicemembers this past year. They ranged anywhere from a few thousand dollars to $150,000 for Special Forces Soldiers and linguists. The average bonus is between $10,000 and $20,000. Many members of the military also wait to re-enlist until they are in a combat zone, and the entire bonus is tax free. But, what should you do with your new found wealth? Many Soldiers spend their bonuses on frivolous consumer purchases like plasma televisions, a fancy new truck, etc. I even knew a Soldier who spent his reenlistment bonus on a sailboat. The sad truth of the matter is that a lot of Soldiers received their money, spend it, and then look back wondering where it all went. The same can be said for year ending bonuses in the private sector. What are some other uses for that money?
Better ideas for your bonus:
Save It. My wife and I saved every dime of my recent bonus to use as a down payment for our first home that we are buying this winter. It is a good thing that we saved it now that the mortgage credit market is becoming incredibly tight after the recent upheavals. The “no down payment” mortgages are few and far between now. Lenders want to see a down payment of at least 5 to 10% of the purchase price and a good FICO credit score.
Invest It. $10,000 invested in a good growth stock mutual fund over the next forty years will grow into $217,000 even if you never added another cent to the original $10,000 bonus (assuming that you earn the stock market’s historical rate of return, 8% annually). If you could squeak out a 10% annual return instead, your bonus would then grow into $452,000. Now that is the power of compounding interest! If you don’t believe me, feel free to check out the Microsoft Excel Spreadsheet.
Pay Down Debt with It. Paying $10,000 to reduce your debt, such as high interest credit card debt, could save you approximately $1,800 per year if you had an average annual percentage rate of 18%. That’s like a bonus that keeps on giving back to you year in and year out.
Many experts recommend that you spend 10% of a bonus or raise, no questions asked, on something that will bring you a lot of personal joy. It is your bonus after all. You earned it. You deserve to enjoy it. You should reward yourself, and 10% is a great guilt free figure. Take 10% and go an a little vacation that you have been putting off forever. Or, buy that used jet ski that you have been eyeing for such a long time. Just buy it with cash from the 10% of your bonus. While I write for a predominantly military audience and discuss military circumstances, personal finance is personal finance no matter what your chosen profession. These tips and ideas will work for anyone’s situation whether you are in the military or have a civilian job.