Give Yourself a Bonus!

Crimson by Greg "Craola" Simkins
It took me a few years to get my savings to the point where I could max out my 401(k) every year. The main reason I wasn't maxing it out was because I followed the standard advice of only contributing 10 or 15 percent of my income to it.

Retirement Advice 101

I thought that if was following the advice that I always heard that I was ahead of most people. To be honest, I was probably doing better than most people by saving just 10% anyways. But I wasn't making $175k per year so 10% was not going to even get me close to maxing it out. Years later, if I still followed the 10-15% advice I would still have a large gap between how much I was saving and the maximum allowed.

But why did I follow the standard rules for what I had heard about saving for retirement? I knew if I followed the standard advice I would be comfortable once I got closer to retirement.

But if I followed the beginner's rules, then I would probably end up with the beginners retirement, and 67 does not sound like the age I want to retire at.

Retirement Advice 201

Eventually I found personal finance blogs which changed my way of thinking about saving for retirement. I stumbled into them quite accidentally, but once I realized I could cut decades off of my working career I woke up, I had that moment where things just click and I knew I could make it work.

Suddenly I realized that the standard advice I followed was for the normal person, and I didn't want to be normal. I wanted to be ahead of the curve, I wanted to retire early.

The first step was maxing out my 401(k) contributions each year. So I figured out how much I would need, and I upped my contributions to a large percentage. The woman in the HR department even gave me a funny look about it that screamed, "wait, you really want to contribute that much?"

Retirement Advice 301

The next piece of advice on retirement savings came from an unlikely place for me. My parents are good with their money but it's not something we really talk about very often. One day I was telling them about how I was maxing out my 401(k) and my mom told me about how she likes to give herself a bonus each year.

Zee: "What? A bonus? What do you mean a bonus?"

Mom: "Yeah a bonus. I contribute enough to max out my 401(k) early so that at the end of the year I start getting a bonus in each paycheck. Since I'm used to getting paid a certain amount, once I max out the contribution for the year my paychecks get larger and I feel like I'm getting a bonus for doing a good job. Also, you are my favorite child, your brother and sister come in at a distant second and third place."

Okay, okay, perhaps the conversation didn't happen exactly like that. She might have not mentioned my brother and sister in the conversation but the rest really did happen. I was in my late 20's when my mom told me that... and she's still taking me to school.

Getting a bonus is a great feeling. Suddenly when your paycheck increases by the amount that you were contributing it can have a few different effects. The first is feeling awesome, because not only have you maxed out your contributions, you've managed to give yourself a bonus to enjoy for doing such a good job. The second is that since it's usually the end of the year and the holidays are coming it can make your holidays not seem so expensive since your bonus is timed with the most expensive time of the year. But since humans can adapt pretty well to certain situations we're used to only having so much money coming in. Most people will have already planned for the holidays in their budgets so your bonus is truly that extra icing on the cake.

If you're truly committed to early retirement you'll probably do what I do and just invest it somewhere else, I find that it's a good kick start to my next years Roth IRA contributions.

I know that not everyone can max out their 401(k) but if you can, I suggest you try giving yourself a bonus. There's nothing wrong with maxing out your contributions early!

UPDATE: As J. Money pointed out to me in the comments, please be sure that if your company has a match that you don't get penalized by front loading your contributions. Some plans only match a certain percentage each month, so if you max out your plan in October you miss out on the potential match (and free money!) for November and December. Some plans avoid this so you might not have to worry about this. But if you don't know ask your HR department for clarification.

Would you try it? Do your parents still make you feel like a novice?

24 comments:

  1. I also learned a lot about finances after reading a lot of personal finance blogs and there are a lot of new ideas I've never heard before but actually work. Also, when I feel like I want to spend some extra money, I always try to remember the power of compound interest and how I'll get more money if I put that into my retirement account instead.

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    1. Suburban Finance,

      Yeah, I like learning new things from other blogs. Sometimes it's not even something that's necessarily new, it's just the way that it's worded that catches my attention in a new way that makes things click. For example this post even, I've heard of front loading your 401(k) contributions, thus giving your money more time in the market, essentially it's the exact same idea but a different way of looking at it. They focus on the investment part, I focused on the "I get more money at the end of the year" part.

      And yes, compound interest is like the Annie Sullivan of the investing world, it's truly a miracle worker.

      Thanks for stopping by, and I hope the wedding goes well!

      -Zee

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  2. Love it :) I was giving myself these bonuses too back in the day, just didn't call it that really...

    One thing to note though, this is a great idea *as long* as you don't lose any employer matches in the process. So make sure you're contributing enough to at least get those while still giving yourself the "bonus" at the end of the year :)

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    1. Hey J$,

      Call it whatever you want but it sure is nice to get that extra money at the end of the year!

      Thanks for pointing out that depending on your employer's plan you could potentially lose out on part of your match. I'll have to add that into the post since that is an important thing to make sure of.

      Thanks for stopping by!

      -Zee

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  3. Nice article Zee! I feel that we all go through a process of realization of our own finance 101's and 201's, just some of us it takes longer than others!

    I like the concept of giving yourself a raise, but I am not at the point of maxing out 401(k)'s to really benefit from this. In fact... not sure if I will be able to if the threshold's keep rising.

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    1. Hey Kipp,

      I think that the goal should always be to try to max it out if you can. Not everyone can and that's fine but it's surprising how much taxes can hurt you. When you put in more you get taxed less so it doesn't seem quite as bad. Also after a while you just get used to having a little less money coming in and you adjust. I say shoot for smaller increments if you can, your future self will thank you.

      -Zee

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  4. I just wanted to let you know that I've enjoyed your blog. You've had me hooked every since the post about your cousin Liam (and churros!)

    I've nominated you for the Liebster Award...its purpose is to bring recognition to new / small blogs (under 200 followers).

    The nominee then has the privilege to pass it forward to 5 other blogs that meet the criteria. You don't have to participate, but if you do want to -- the rules can be found on my post about my nomination:

    http://www.mommakescents.com/liebster-award-nomination/

    Keep up the good work!
    MC

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    1. MC,

      Thank you so much for the support and the nomination. One day my nephew Liam will probably see that post and start calling me a liar. I was pretty busy this week so I'm just catching up on the blogosphere, so I'll definitely stop by!

      -Zee

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  5. Great work here, Zee. I fell for he exact same 10-15% "rule of thumb" and no doubt squandered the rest in my younger years.Good point also on keeping an eye on the company match....your company needs to "true-up" the entire match at some point or you do indeed miss out on the full match. I've found that some type of auto-withdrawals is the name of the game.

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    1. Jon,

      It's funny how when (most) people look back at their finances they wish they did something different in their earlier years. I mean, I'm glad I heard the advise to contribute early, but I wish the advise was just to try to max it out as early as you can. Thanks for stopping by.

      -Zee

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  6. "Suddenly I realized that the standard advice I followed was for the normal person, and I didn't want to be normal."

    That's an awesome quote and one that I believe in completely. It is amazing how trapped people become in following the conventional way of thinking, and then are surprised when they get conventional results.

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    1. Chris,

      Yeah, it's funny how people follow standard advise and expect above average results in many aspects of their lives. If you put in the average work on something you should expect the average results.

      -Zee

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  7. I like the idea, though I don't know if it's for me. I tend to like to see all of my cheques before allocating them. I like the idea of tricking myself into thinking I get a bonus, though.

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    1. Daisy,

      Yeah, this idea doesn't work for everyone, we all have different shapes and sizes or things in our lives. Sometimes those round blocks just don't fit into square holes. This is a method that works for me and I like though. But I do see the appeal of seeing your money and allocating it yourself. But with a 401(k) plan I kind of have to have them deduct it before I get to see it.

      -Zee

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  8. Holy hell, your mom is awesome! Such a great way to reward yourself for maxing out your 401k. And being schooled by your parents in your twenties is nothing to be ashamed about, happens to me on a weekly basis. :)

    Too bad I don't have access to a similar vehicle, seems like it would bump up my savings rate greatly.

    Cheers,
    NMW

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    1. NMW!

      Yeah my parents still drop knowledge on me, the key is making sure to actually apply the parts that work for you.

      I like your name by the way, I always feel like it needs an exclamation point after it for some reason :)

      Thanks for stopping by!

      -Zee

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  9. I like the idea! Great job maxing out your 401K too.

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    1. Thanks Holly! It's all about the little victories in life (actually, I think this is one of the bigger victories!)

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  10. That "bonus" trick is a good idea. So come the holidays you feel like you're getting "free money".

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    1. Thanks Edwin, you should try it if you can! It's really nice to see that bonus at the end of the year. Thanks for stopping by!

      -Zee

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  11. I would totally try this, but would probably be tempted to save that extra "bonus" at the end of the year. I can't resist the opportunity to purchase additional income producing assets! :)

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    1. Addison,

      There's nothing wrong with saving the bonus! That's what I usually do, it just gives me that kick start on my Roth IRA for the next year.

      -Zee

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  12. Loved this ~ The woman in the HR department even gave me a funny look about it that screamed, "wait, you really want to contribute that much?"

    My company matches up to $6000 per year. If I contributed more, then I think the match would just stop for the latter part of the year. Currently, I do not contribute more, because we are paying off debt but sometimes I wonder if I should and then slow my debt repayment. We want to have the debt gone in 4 years though so my husband can retire at 65. I totally agree with you though about giving more than the 10-15%. What kind of outdated advice were we all following. I'm saving 45% of our income now but the majority of that is going to debt. If I didn't have debt, imagine how fast my investments would be growing!

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    1. Hey Debs,

      I'm glad that you're contributing to the point where you're taking full advantage of that match. I think that paying down debt is a good plan, if you really think that your investments will repay more than the percentage that you're paying on debt then it should be something to consider. That's the only reason I'm not in a rush to pay down my mortgage quicker. Since I've had it I'm certain that so far I've beat the 3.4% interest rate on it. But if it were somewhere closer to 6% then I would start considering paying that down quicker since that's a guaranteed return.

      Once you crush that debt you'll be building up your savings pretty quick with a 45% savings rate, that will be awesome! Thanks for stopping by!

      -Zee

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