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Waterfall Your Bonus

For a lot of people, bonus season is an emotional time of year.  A wave of excitement flows over me as I impatiently wait to be informed about my year-end number.  I can’t help but think about the company’s performance, my contributions to its successes and how this year’s bonus will be even better than the last one.

With all the excitement and positive vibes flowing through the office, it’s easy to forget that bonuses are based heavily on whether or not your superiors actually remember all of the great things you did over the past year. Will they recall all those times I willingly stayed late? Or the times when I worked back-to-back weekends?  How about the countless number of plans I had to cancel for the good of the company?

The answer is a resounding… maybe.  But I highly doubt it.

My past experiences have taught me that it’s not uncommon for companies to come up with some poor excuse not to pay employees any more than they have to.  As someone who manages the bottom line, I understand that it’s unlikely that any employee will ever be paid what they believe they deserve.  Overpaying employees just isn’t a smart way to run a business. But, as an employee, it irks me to no end.

So how, you ask, is a decision made on who gets a bonus and how much it will be?

The big wigs call a meeting to discuss employee ratings.  The end result of this meeting is a pretty little bell curve composed of ‘poor’, ‘met expectation’ and ‘out-performed’ to help them determine who gets what.  (Of course, management compensation plans are exempt from this process.)

Meanwhile, the employees lower their expectations and brace themselves for disappointment.  The company proceeds to pay them bonuses that are just slightly above their “disappointment” amount.  The bonuses are never high enough to make retire the very next day, but they’re also never low enough that it pushes you over the edge and walk out the door.  You find your attitude towards the situation is balanced perfectly between bitterness and annoyance.  “One more year” you tell yourself “one more year.”

Regardless of the amount, the fact of the matter is that extra money is coming your way!  What you do with this additional income can have a huge impact on your life today as well as in the future.

The single best piece of advice I can give someone who receives a bonus is to never count on a bonus to live.  Even if you are privy to bonus discussions, the amounts thrown around versus what actually hits your bank account can often change.  You don’t want to end up like Clark W. Griswold in Christmas Vacation, do you?

The second-best advice I can offer concerning bonuses is to be smart and pay yourself through waterfalling. For those of you who don’t know, the waterfall method is nothing more than putting your money to work based on your highest financial priority and letting the money flow over and down into secondary goals.

As with everything in personal finance, not every waterfall will be the same.  Individual financial priorities will differ as well as change over time.  In order to illustrate waterfalling, I have simulated my own thoughts on receiving a year-end bonus and what I plan to do with it below:

<< 1st Priority >> Fund Retirement Account(s) – Though these are not my favorite investment accounts, it’s hard to argue against the power of pre-tax investing paired with a MATCH by the company.  I’ll max out my 401(k) up to the company match and not a penny more; otherwise, I am just leaving a piece of my income on the table.

<< 2nd Priority >> Eliminate Debt – At the moment, there is no mortgage, no car and no more student loans.  I plan on erasing all the credit card debt that my wife and I have accumulated.  With a high interest rates for each card, it’s the worst kind of debt, after all.

<< 3rd Priority >> Savings  This represents my 1-3 year plans that will require immediate access to cash as well as zero risk of loss. Examples include moving expenses, the cost of purchasing a home, auto related expenses, et cetera.

<< 4th Priority >> Invest – Once I meet my savings goal, there is no sense in letting cash sit around idly.  Instead, I will continue to build up my taxable investment portfolio. Remember, only those who are liquid can be financially free.

Though the waterfall depicted above serves as a good example, each one will differ from person to person.  While some people may only have to focus on one or two priorities at a time, others may have a full plate.  Regardless of how much your waterfall runs, the goal is to make positive financial progress.  Even filling up one bucket is a step forward, it’s never the wrong move.

 

How do you waterfall your bonus?

 

Edited by Brianna Roney

4 comments

  1. We pretended that the regular and reliable bonuses didn’t exist. So when that 20-35% of base pay did arrive almost every year it was purely extra and 100% of it went to investments. None of it went to the 401K or a Roth because we had maxed those out already with our base pay. We also never borrowed a cent to buy a car or ever ran a balance on a credit card. We did have a mortgage but paid it off pretty early. I think the best thing is to live on much less than your base pay and save 100% of any bonus you get. The last few years I worked I was saving over half of what I made because my pay was much higher but our lifestyle was unchanged.

  2. I love your waterfall concept! I did the debt and then retirement saving, but either way leads to financial success. It is all about putting any extra money towards worthwhile financial goals.

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