DS wants to know: What to do with large year-end bonus?

Parent Cafe
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<p>My son’s got a nice problem…what to do with his bonus? </p>

<p>B-day was today; the actual bonus to come in a lump sum early Jan '08. He’s not sure what to do with it. Neither am I.</p>

<p>Particulars: rent for him and gf, both Carnegie Mellon grads, upper East Side NY is currently $1800 shared, with him shouldering 2/3 of that (he makes more and she has huge college loans) for their one-bedroom. He works Battery Park area but more often Exchange Place, Jersey City, which is just one stop on the PATH from World Trade Center. She works in midtown. But if he buys he wants Manhattan only. I think he ought to look in Jersey City or Hoboken (closer to work and cheaper) but he says no.</p>

<p>When does he consider buying? He’s not sure what he could actually afford, if anything. I spoke with him at length tonight…she’ll be in the picture near future at least, not getting engaged for a while, he’s 25 she’s 24—therefore his thought is to buy on his own, she pays him “rent”. Or perhaps he can’t afford it yet. He feels with the lending credit crunch it’ll be impossible for him to land a mortgage. And how do lenders view “bonuses” anyway? </p>

<p>Works for i-bank basically in tech. Current bonus equals salary, so even after taxes check should be about $50K. Also getting 42% (!) raise in base salary retroactive to Dec 1 '07. They seem to love him at work, and he is very happy there, so I believe he’ll stay…maybe MBA in future but given his earning curve it might not make sense, plus he already has a masters degree. I mention this because I see him at same firm for near future, working and not returning to school. </p>

<p>If not housing, where else would he put this $? With this raise he’ll see a large increase in paycheck so he doesn’t need this bonus money to live on. He and gf do not have extravagant life styles. He already maxes (?) out on 401K, which is matched by his employer.</p>

<p>Any suggestions are appreciated!!</p>

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<ol>
<li><p>Send it to me. :)</p></li>
<li><p>Pay down his college, car, or other loans, if any.</p></li>
<li><p>Save most of it to put down on a house.</p></li>
<li><p>Use part of it to have fun with - a trip somewhere.</p></li>
</ol>

<p>And, congrats to your son for his success.</p>

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<p>Rather than NJ, how about some very nice neighborhoods a subway ride from Manhattan – Brooklyn Heights (views of the city and you can commute by foot or pedal across the Brooklyn bridge) or Prospect Park (also in Brooklyn)?</p>

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<p>Donation to CMU. This week he/you should have received the last of the beg for this year and beg pledge for next year.</p>

<p>If he/they donate enough, maybe CMU will name a classroom chair in his/her honor.</p>

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<p>Fund 529 for your future grandkids, so you won’t have to do it again. NY has $20,000 deduction (?) of income. Think >25 + years of contribution and taxfree compounding.</p>

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<p>The one thing that 25 year olds don’t think about: Fund an IRA with at least some of it. Compounding is your friend!</p>

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<p>So he already has his 401 K maxed out.Assuming he has his debts under control-and I mean NO credit card debt that isn’t paid in full monthly and no student loans or other debt, I would put it in mutual funds or a money market account to earn interest so it can compound and be there when he is ready to buy. Sadly, that size bonus probably isn’t enough to buy a place for a while. If he has debts, I would pay them off first.
I actually like the Capital One money market accounts which are earning almost 5% interest right now, completely liquid and risk free.<br>
But I am sure others will have better ideas…this is just what I would do if the money was mine.</p>

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<p>thanks for the suggestions thus far, I’ll send everything up to DS.</p>

<p>I forgot. He has about 35-40 K school loan. But we consolidated summer of '05 when rates were historically low, I’m going to say 3% (I think??) or thereabouts. Given that rate I’d assume he wouldn’t want to prepay?</p>

<p>He doesn’t have unmanageable credit card debt to my knowledge. Very level headed and conservative but doesn’t want to “miss out” on whatever opportunity may be out there.</p>

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<p>I don’t like debt hanging over my head so I’d pay off the school loans even with the lower rates. If he tried to get a mortgage the payments he makes on the loans would be deducted from his income when computing what he’d qualify for. Ditto with car payments and credit card payments.</p>

<p>If he has any credit card debt at all then of course he should pay that off right away and make sure he never incurs any more by simply paying the bill in full every month.</p>

<p>Paying off debts before incurring new obligations is a simple way to keep out of financial trouble.</p>

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<ol>
<li>Send it to me.</li>
<li><p>Send half to UUDad and the other half to me.</p></li>
<li><p>Pay off the loan. Really. He’ll never be sorry he did.</p></li>
</ol>

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<p>Congrats to your son for his success! The reality is that even with the big raise in the new year, he will not be able to afford much/anything in Manhattan. I vote for focussing on paying off his student loans and perhaps using a portion of it to buy something special, that he wouldn’t otherwise have been able to buy, or taking a nice little trip.</p>

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<p>Agreed – with one IB bonus, it would be difficult to buy anything in Manhattan. He would want at least a one bedroom, and it would be hard to get something nice for less than 500-600k. He doesn’t want to be in a situation where he puts in every last dollar for a down payment and then is stretched thin or left within significant savings; there are serious costs once you get an apartment in NYC because many are not as new as you’d like and you want to get new floors, appliances; those types of things cost more in ny than anyone plans for. I do agree with his view on not buying in JC; regardless of how close it is to work, once you buy an apartment it is generally for the medium/long term and while it may be convenient for him right now – what if he switches jobs or his company gets new offices or he gets tired of having to commute into Manhattan on weekends to see friends etc. </p>

<p>Having given this stuff lots of thought myself, I’d say he should save almost the entire bonus (though I’m sure he’s working long hours so buying something extravagant or taking a nice trip is certainly in order!) so that when combined with next yr’s bonus, he’ll be in the position to seriously consider buying an apartment. I would go with a money market/mutual fund --diversified but a safe investment. He really doesn’t have that much school debt, as compared to most IB and lawyers in the city, so he won’t have trouble qualifying for a mortgage in a year or 2 even with that debt. So I don’t think he should pay it off as a lump sum (it makes more sense to invest the same money at a higher rate than to pay off the 3% loan); if it bothers him to have that debt hanging over him, certainly he could use maybe a quarter or third of his bonus to pay down some of it. Congrats to your son – it is a nice time in the city for all the young professionals – being over-worked and stressed the rest of the year certainly pays off in Dec!</p>

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<p>Do not payoff a 3% student loan. Keep that loan as long as you can. That loan is gold. You can buy tax free municipal bonds that make more than that.</p>

<p>At his age though, I would buy some equities. I wouldn’t be afraid to take some risks. </p>

<p>DO NOT PAY OFF THAT LOAN!!!</p>

<p>I hope I am clear. :)</p>

<p>He needs to talk to somebody at the IBank that is involved in the finance side of the business. That person will help your son.</p>

<p>Do not invest in any mortgage paper. ;)</p>

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<p>Umm not in Manhattan. $1000 a square foot is about the going rate for apartments in non luxury buildings almost anywhere in the city. A decent sized one bedroom would be around 800,000. If it’s a newer doorman building expect 1m</p>

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<p>I am sure it is very exciting for your son to receive this kind of bonus for the first time.Tell him just to park it in the money market account for now. In these uncertain times for both the stock and housing markets, cash is king.
My 25 year old son was in IB (Mergers and Acquisitions)for two years and now works in a hedge fund. He has resisted buying any type of housing because if a new job opportunity presents itself,(he gets calls from headhunters all the time) he wants to be able to move on pretty quickly.</p>

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<p>First of all, CONGRATULATIONS to the PARENTS!!! And, of course, congratulations to the young man.</p>

<p>A 3% loan is the one you’d want to keep. We wanted to pay cash for our car, but 0% loan was hard to resist, so we have car payments and cash invested elswhere.</p>

<p>Here is my math. OP stated that the bonus will be close to 50K. Given the fact that bonuses are taxed at the max rate no matter what your real tax rate is, it means the son is making close to $75K. With the raise, it will be around $100K (of course, I’m just estimating). The rule of thumb is that max. mortgage (at current rates) should not exceed 3Xannual salary. $300K is not a huge buying power in Manhattan! And why should a young unmarried person tie himself down with a condo when in just a few years he might take off to a different place?</p>

<p>Putting some in Roth IRA (if the income level still allows it) or a nice blend of money market funds/stocks? I personally do not support the idea of spending the bonus on toys or fun. May be a small portion on some frugal fun. Savings should always come first.</p>

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<p>Roth IRA was also my suggestion, if he is allowed to. At his age, the tax free income will be invaluable and sounds like he won’t be able to do it in the future due to his high income. He can put the max in for 2007 and 2008 and still have a lot left over for investing.</p>

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<p>I think buying real estate, even a primary residence, is more of a middle aged dream than a young person’s dream. It also surprises me how people still see that as a wise purchase given the current real estate climate. I understand that a home provides security, but not if you suddenly find yourself wanting to relocate to another city, or if the industry you’re working in has a massive shakeout, and you don’t make the cut because you don’t have as much experience or whatever. </p>

<p>It’s a LOT of money for someone in their 20s with a year or so work experience. In Manhattan, it’s not so much. I’d vote for spending some on travel and investing the rest and see what next year brings.</p>

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<p>I thought the IRA was a good idea, Chedva. And I’ve always been told that the student loan is the slowest, lowest interest rate in the world. If paying it off feels like just another utility bill to him, perhaps just keep the loan going. If he feels like the loan payment is choking him monthly, then he’d like the freer feeling, as UCLA_dad described, to enjoy his salary more. Depends on whether you dislike loans on principle (what a silly pun). </p>

<p>A different approach, even before travel, is to find out if he’s really enjoying his tremendous cultural opportunity in NYC. Maybe he’d get more out of a subscription ticket to a symphony, regularly attend Broadway shows, excellent professional sports tickets, get two tickets at a great dance troupe subscription so he’ll have incentive to ask people out and partake in this incredible city while he’s young. </p>

<p>Maybe he’d like to join something like an organization or place of worship, that will give him plenty of new people to meet outside of work, so use it for membership dues. </p>

<p>Is he in good shape? How about buying a personal trainer at a gym for half a year?</p>

<p>Charitable donation before the year ends, so it’s on his income tax. I assume this is part of every wealthy person’s lifestyle, but he’d see what it feels like in NYC to be on those lists and invited to parties for donors, patrons and so on. It’s very social to be a giver in NYC. Even if he starts young, he’ll understand it as a habit and it’ll grow each year. IF he’s a softie, finance an overseas kid in poverty to get a letter and a picture each month. Like Jack Nicholson in (can’t recall name of movie, but he retires and does this…).</p>

<p>I’d do these things before I’d take a vacation. Dig deep into the lifestyle of NYC. Lucky man, I’m sure he’s working hard for the money so should enjoy the urban lifestyle or taste it, anyway.</p>

<p>My S and his g.f. live in Manhattan (rather than Long Island City and other map-sensible New Jersey locations). They say it means a lot to them at their age, although the space is crowded. Rationally, it’s all connected by subway, but there’s a psychology, too. Some prefer to live much smaller in size, just for the access and address-identification to be on the island itself. He’s young, and this could all change someday, but it’s exciting to be in the heart of the beast, especially with no children to afford.</p>

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<p>First, I highly recommend he do the Roth IRA. See the Roth info at [Tax</a> tip: Roth IRA rules
or](<a href=“Bankrate: Guiding you through life's financial journey”>Roth IRA Rules You Need To Know During Tax Filing Season | Bankrate.com) [An</a> IRA Primer (Retirement: Personal Finance) | SmartMoney.com](<a href=“Retirement Planning - Financial Planning for Retirement - MarketWatch”>Retirement Planning - Financial Planning for Retirement - MarketWatch)
This is a terrific instrument for the young investor – money in a Roth is never taxed on earnings or withdrawals, and he has lots of years for that tax-free investment to grow. He may never qualify for a Roth again, because he may well exceed the income limit in future years. The max contribution he can make for 2007, however, is $4,000 so that still leaves a big pile of cash.</p>

<p>I agree that the 3% student loans should be kept. He can invest his cash in higher-performing yet safe low-cost mutual funds. Give him a good book on basic investments as a holiday gift.</p>

<p>No need for him to rush out and buy real estate, especially in NYC’s tough market. He can enjoy being free and flexible at this point in his life.</p>

<p>Perhaps he can use 10% of the bonus for a splurge on a vacation or whatever indulgence he cares to make. I like the idea suggested above of using some of the bonus to explore NYC’s offerings. Sharing his wealth via charitable contributions to some causes about which he cares is another great idea.</p>