Many Americans face a fortunate dilemma when they receive their annual bonus: what’s the best way to use this windfall?
It’s a question that requires more thoughtful consideration than you might think.
Josh’s Financial Situation
Let’s look at a real-life example of Josh, a professional in his late 40s earning a solid $130,000 salary with an additional $26,000 annual bonus.
Josh has been disciplined with his finances in many ways:
- He maintains a burn rate (Br) below 50% of his gross income, which is impressive regardless of income level.
- Has built significant equity in his home with a healthy Real Estate Term (Rt) score
- Consistently contributes to his retirement accounts, reflected in his Qualified Term (Qt) score.
Despite these positive financial behaviors, Josh has a critical gap in his financial picture: liquidity.
The Liquidity Problem
Josh’s Liquid Term (Lt) score is dangerously low, indicating he has very little cash readily available for emergencies or opportunities.
This is a common blind spot in American financial planning.
Many people focus entirely on retirement accounts and real estate while neglecting the importance of accessible cash.
Without adequate liquidity, you limit your ability to:
- Handle unexpected emergencies without debt
- Reduce financial stress and anxiety
- Navigate job transitions or income fluctuations
- Capitalize on time-sensitive investment opportunities
The Smart Bonus Strategy
For Josh and others in similar situations, here’s the recommended approach for using bonus money:
- Pay off high-interest debt first – In Josh’s case, eliminating his $4,000 credit card balance should be the immediate priority. As a rule of thumb, work to pay off anything higher than 7% interest debt, especially if it is consumer debt.
- Build emergency savings – Focus on increasing the Liquid Term (Lt) score to at least 0.25 (three months of expenses) before allocating money elsewhere.
- Only then consider other options – After establishing adequate liquidity and eliminating high-interest debt, you can think about discretionary spending, additional retirement contributions, or even mortgage principal payments.
The combination of these steps creates a foundation for financial flexibility that many Americans lack.
Beyond the Math
Financial decisions aren’t just about numbers—they’re about creating options for yourself and your family.
Having liquid assets allows you to self-actualize, pursue educational opportunities, and respond to both challenges and opportunities with confidence.
Want personalized guidance on how to balance your financial vitals and make the most of your income? Schedule a free coaching session with one of our certified financial coaches today.
