How To Turn A Cash Bonus Into Lasting Wealth

We share an eight-step plan to turn a cash bonus into lasting progress, from tax clarity to smart spending, debt payoff, savings, and flexible investing. Along the way we bust withholding myths and show how to align your mortgage with your retirement date.

• checking bonus tax withholding to avoid surprises
• spending 10% to boost satisfaction and reduce regret
• clearing credit cards, personal loans, small auto balances
• building a three to twelve month emergency fund
• confirming retirement savings targets and account choices
• modeling college costs and picking funding levels
• timing mortgage payoff for day-one retirement freedom
• using a brokerage account for flexible investing

To learn more about Stansell Wealth Planning visit:
https://www.StansellWealth.com
Stansell Wealth Planning
5550 Granite Pkwy, STE 270  
Plano, TX 75024  
469-606-2040

Transcript

Why Cash Bonuses Need A Plan

Tax Withholding Myths And Math

The 8-Bucket Priority Framework

Spend 10% To Stay Sane

Speaker 0:16

Hello, hello. Hope everyone is doing well. It is February as of the time of this recording, and the Super Bowl was yesterday. And uh rather non-eventful from the actual football standpoint, but hope you enjoyed. I appreciate you joining. Welcome to the Stansell Wealth Planning Podcast. My name is Cody Stansell. We go over financial planning topics once a week. We have a new episode come out, and the financial planning topics span from investments to estate planning to taxes to cash flow to debt management, all the financial planning topics. So I appreciate you joining us here. Please do us a favor, follow our podcast. That way you are alerted every time we come up with a new episode, and it helps us out to know our audience. So today's topic, we will dive right in, is it's bonus season. So if you are one of the fortunate ones to receive a quarterly or annual bonus, this is a great topic for you of okay, I received my bonus. Now what? What should I do with that money? How should I think about it? How should I prioritize the different topics? So we'll dive right in. Um in this this topic uh or this episode, excuse me, we'll go through cash bonuses. So if you receive stock compensation, restricted stock units, stock options, those kind of things. I'll I'll shoot a different episode in the future because that's a different process, right? But if you just receive a cash bonus, uh your employer you know added it to this pay stub your compensation, this episode is for you. So we go through a checklist with all of our clients how to prioritize this cash bonus, whether it's five grand or a hundred grand or five hundred grand if your business sold or went public, it's how do I prioritize this cash, right? So we go through this checklist, and there's actually, let me count here, eight different items on this priority list. So it's a typical bucket mentality. Fill up the bucket until it's full, and then once it's full, move on to the next bucket. So I go through all these eight different things. I want you to complete all of number one, and once you do number one, then go on to two. Once you complete two, go on to three, and so forth, right? So, first thing when you receive a cash bonus, is make sure your employer saved enough tax withholding from your bonus. That way you won't have a tax, a surprise at tax time next year when you come to follow your return. And you might be saying, wait, Cody, I thought it was up to my employer to withhold enough in taxes. That is not true. That is false. It is completely on you. Uh, but there's a lot of confusion here on taxes and bonuses. Your bonus is not taxed differently than your normal salary. Okay. It is just income to you. But some companies withhold too much or not enough from their bonus, from your bonus check. Okay. A lot of companies, and what I mean by that, your bonus is taxed like you made it with your salary. Same tax law, same tax bracket, same everything. You fall into those same tax brackets. But every company has set rules of how much they withhold in taxes. So the most common ones are 20% or 22% or 25%, somewhere around there. So your company has a guideline, a rule that uh whether we give you a million dollar bonus or a $10,000 bonus, we're going to withhold X from that paycheck. Okay. And like I said, it could be 20%, it could be 25%. Every company is different. And that's where the confusion comes in from clients. Ah, my my bonus is taxed at 20%. It's like it's not, it just falls in your normal tax code. But how much your employer withholds uh in taxes from that paycheck is obviously a certain percentage. So whether they withhold 20 or 25, that's great. But if they withhold 20 or 22 and you're really in the 24% tax bracket because of your salary, your bonus, your spouse's income, then they didn't withhold enough, right? And so you're going to have a um tax bill, you'll owe taxes, come at tax time. Okay. So let me share. I apologize for my podcast people, but if you're watching this, you'll you'll see this visual here on YouTube here in a second. If you are listening to the podcast, it may make sense for you to pause, go to YouTube. You can actually watch this. So I'm because I'm about to share a screen here, and it'll make more sense. Let me do this here. Okay. So once again, if you're listening to the podcast, what I'm showing is just the 2026 tax tables. It's from the taxfoundation.org. So, what I mean by that with the tax planning around your bonus is let's say you make a hundred and sixty thousand dollar salary, right? Your spouse makes 50 grand, let's say. Okay. So your salary per plus what your spouse makes is $211,000. Okay. Let's say you're married. On this chart, this column right here is if you're a single filer. The middle column is if you're just mild, excuse me, married, not mild, married, filing jointly. And then this column right here is head of household. Almost nobody files that way, so you can ignore that one. Let's say you're a married couple, you make 160 salary, your spouse makes 50 grand, and you receive a $100,000 bonus. Okay. So realistically, you're going to be what we call in the 24% tax bracket. Your salary and your spouse, you get you guys make two ten combined, but your $100,000 bonus is going to be taxed all at 24%, right? Because that $100,000 falls all in the 24% tax bracket. Now, not all of your $310,000 income is taxed at $24, right? We have an aggregated system or um, as it goes, a progressive system system, let me say. So if your employer withheld 20%, but you're really going to pay 24% on that $100,000 bonus, you're going to owe a 4% difference. So they're they withheld 20 grand, but your bonus is really taxed. The taxes on your bonus is really going to be 24 grand, you're going to owe that four grand more at tax time, right? And it obviously gets worse if you're really in the 32% bracket or the 35 or the 37% bracket, right? And a lot of times your employer doesn't know exactly what your spouse is going to make that year. So they don't they don't withhold enough, right? So none of this is necessarily good or bad, but just know if you're going to have a surprise at tax time and vice versa. They could withhold 25%, but you're really in the 22% bracket, right? So they overwithheld your taxes and you'll owe less at tax time or get a refund. Right. Either way, the first step is figuring out if you'll owe more at tax time or receive money back. It just helps your cash flow, right? So that's the first step that we want to look at when we're planning on a cash bonus. You just have to have a plan for it. You have to have a plan for that. Okay. So that's the first thing. Understanding am I about to owe more in income taxes from my bonus? Second thing, this may surprise you. The second item I want you to do, spend 10% of your bonus. Okay. There are a lot of studies out there that spending 10% of a windfall, whether it's a bonus from work, an inheritance, etc., it will help you use the other 90% wisely. Okay. If you save all 100% of your bonus, then your chances of regret, you know, you regretting not enjoying your bonus will negatively impact your mood. Your marriage, your spouse may, you got a bonus, why don't we go on a trip or something? It'll affect your appreciation and your gratitude for the bonus, right? Because you didn't really realize it. You didn't recognize the benefit from it if you'd saved and paid off debt and all that. You know, you could do good things with it, right? But you didn't realize it mentally by not spending any of it. So take a trip, buy a boat, go blow it. So yeah, I knew you probably you didn't think I would say that, right? But I'm not a regular financial planner. I'm a cool financial planner. So that's the second one. The third thing is do you have any consumer debt you need to pay off? This is pretty straightforward. You have any credit card balances, personal loan from a bank, you still owe a friend or a family member some money, etc. Uh, you still have a little bit left on your car loan, use that cash to pay it off. Right? So pretty straightforward. Fourth thing, do you need to beef up your emergency fund? So your savings account at a bank, right? We like to use save, you have uh cash at your bank equivalent to three to twelve months of expenses in a savings or a high yield account for a rainy day, right? So let's say you spend 10 grand a month and you want to have six months saved, but you're currently at fifty thousand dollars in your savings account, then keep keep 10 per 10 grand of your bonus in this savings account just to beef it up and increase it to that sixty thousand dollar number that you want. Okay. So the first four, right, make sure your taxes are in good order. That way we don't accidentally owing more at tax time. Second one, spend 10% of your bonus. Third one is pay off any consumer debt. Fourth is beef up your emergency fund. Number five is are you saving enough for retirement? Right. This is a lot of times where financial planner comes in because a lot of people say, Cody, I have no idea. I have no idea if I'm saving enough for retirement. Help me determine that, right? So this could be this topic by itself, could have been its own podcast, right? How much do we need to save for retirement? But do you need to max out your Roth IRAs? Do you need to add more to your 401k for the rest of the year to catch up on retirement savings? There's a lot of that goes through. I meet with a lot of clients that say, Yeah, we look at the numbers, we crunch the numbers. Yeah, we need to save about 10 grand or 15 grand more for retirement this year. Boom. Take that 10 or 15 grand, add it to retirement accounts. Okay. Number six, are you saving enough for the kids' college? We have software to help answer that. We have software that says, okay, here's how old your child is today. Assuming they go to college when they turn 18. Where do they want to go to school? We have the software actually tells us this is exactly how much it cost last year at Baylor or Texas Tech or SMU or Rice or UT or Stephen F. Austin, any of these public institutions, it'll actually tell you what it cost last year. And therefore, okay, here's my child's c age currently. We want to spend this money when they start 18. So we need to have X saved, and the software goes through that. So, yes, it looks like we need to save $6,000 a year in our college account. Or what will a lump sum of $20,000 today, this year, saved, but not adding anything for the rest of my child's adolescence? You know, where does that get us? And so we use that software to help answer, answer that question. So that's number six is are you setting enough for your child's college? Number seven, are you on pace to pay off your mortgage before retirement? Okay. And hear me, I didn't say step seven, pay off your mortgage with this bonus. That's not what I said. We don't necessarily think you need to pay off your mortgage ASAP, but we do want you to be debt free in retirement, including a mortgage. So use a portion of this bonus to throw at your mortgage to be debt free day one of retirement. AKA, you have 200 grand left on your mortgage. And with the normal payments, you'll have it have it paid off in 15 years, but you retire in eight years, right? Then you need to make extra principal payments or use lump sum uh from this bonus to throw at the mortgage to be debt free in eight years, right? So hear me through that. Not sure how to calculate this, you're in luck because that's what we do. We can help you through that process of okay, if we if we pay 10 grand more every month or 20 grand more, excuse me, not per month, 10 grand more every year, or 20 grand more every year. Yes, we will be debt free by day one of retirement. Okay. So once again, we don't necessarily want you to be mortgage free ASAP, but we want you to be on track to be mortgage free day one of retirement. Okay. And I could, once again, that could be its own episode as well on the podcast. So that was number seven. The last one, number eight, if there's any money left over, then the brokerage account is the ultimate pour over place, if you will. So there's no limit. You could add a million dollars to a brokerage investment account tomorrow. So any remaining balance from all of these going through all of these steps, you can invest in a brokerage account. Let the compound interest work for you. Use the proceeds in the future on anything. Okay, so it's not a retirement account. You don't have to wait until you retire to spend it. You can spend it on anything, right? You could buy, use it to save up for a rental property you want to buy in two years, or a lake house you want to buy in five years, or use it for your kids' college, or a new car in 10 years, or not touch it at all. You didn't need any of it. You don't touch it until you retired, right? It's ultimate flexibility. So that's what makes it a great account, a great account for yeah, anything left from a big bonus like this, that's a great account for it. Okay. So I know this sounds like a lot of steps and a lot of, oh, there's surely I'm not going to get through all eight of those and still have money left over. But I think you'd be surprised if you sat down with your particular situation and went through that. I know some of these you probably, these numbers you won't know. Am I on track for retirement? Good question, Cody. I don't know. Am I on pace to pay off my mortgage before retiring? Good question, Cody. I don't know. Right. So there's some of those that you may need may need help from a professional. But last thing I'll say here is let me just go through an example, right? Let's say you receive a $100,000 bonus net to your bank.

unknown 15:05

Okay.

Crush Consumer Debt

Speaker 15:05

So really it maybe it was $140,000, $130,000 gross bonus, but they withheld taxes and then 401k and 5K. Let's say just $100,000 was on your pay stub as net to you. Okay. So remember, number one, check on your taxes. Maybe you realize, yep, they didn't withhold enough. So we need to set aside $4,000 in a savings account, knowing that we'll pay that at tax time. We know we're gonna have a tax bill. We know it. Set aside that money, no surprise, everyone wins. Okay. So four grand there, and then spend 10% of the hundred grand, right? So you spend 10 grand on a family vacation. Spouse is happy, your kids are happy, everyone's happy. You realize the bonus mentally, everyone wins. It was fantastic. So 10 grand there, and then the next one, pay off consumer debt. Let's say you have 10 grand left on a car or a truck to pay off, pay it off. You save those payments immediately, right? It's an immediate cash flow benefit to you because now you don't have a car payment, right? So that's already an investment that's paying off for you. Okay. Next one, emergency fund. Let's just say your emergency fund is already in a good spot. You didn't need to add to it. That's great. And then the next one, you checked on your retirement accounts. Yeah, let's max out our Roth IRAs for me and my spouse. That's $8,000 each for 2026, which is $16,000 total. So you say, yes, let's add $16,000 to our Roth IRAs total. Um, if you're keeping track, that's 40 grand spent, six, you know, accounted for, spent and accounted for, 60 grand left. Okay. Then you meet with a great financial planner like us or someone else, and we go through the kids' college and you realize, yeah, we need to save 10 grand to a college account for the kids this year to catch up. Okay, 10 grand there. And then we also meet up, we go over the mortgage, and yeah, we need to we need to pay 20 grand extra every year to our mortgage to be on track to having it paid off by day one of retirement so that we're debt free. Fantastic. So bing, bang, boom, you go through all those. That's $70,000. So you have 30 grand left, right? And that's where a lot of people, okay, now what? A lot of people just throw it at the mortgage, which is fine, or add it to the college account, which is fine, or go take another vacation, which once again, that's okay too. That's fine. But that's where I'd say, okay, let's take that 30 grand, add it to a brokerage account, invest it for future you once again let the compounding compounding work for you. So hopefully that was helpful. Hopefully that helped to go through the ins and outs. And as long as you have a plan, as long as you have a priority list, it's pretty simple from there. Of course, some of those topics that you can't really do yourself or you need a professional to help you for. That's why we're here, right? So reach out to us.com is the website. I'm at Cody at stancelwealth.com is my email address, and our phone number is 469-606-2040. God bless you. Have a good rest of your day. Thank you for listening to the Stansell Wealth Podcast. This podcast is for informational and educational purposes only. It is general in nature and may not apply to your specific situation. Please consult with a professional before acting on any information shared in this podcast pertaining to financial, investment, legal, or tax advice. The views expressed by Cody and his guests do not necessarily represent those of Charles Schwab, Victory Financial Group, or any other organization.