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I am 34 years old, make about $65,000 a year. I'm debt free aside from my home and just got a $4,600 bonus. I usually get about $10,000 per year in bonuses. I have a fully funded emergency fund and am curious what would be the best thing to do with my bonus. I am trying to pay my house off early, but when I take the cash-out option for my bonus it is taxed at about 50%. I don't like the idea of turning $4,600 into $2,300, but would like the cash to pay down my mortgage. Should I just put the bonus into the company provided 401K? And then attempt to find other ways to pay down my mortgage?

Hello Marcus and thank you for your email.

It is so great that you are debt free and thinking so early about paying off your home. Since you have no other debt, a fully funded emergency fund, and disposable income, this is a great place to put it.

I totally agree with you about turning that $4600 bonus in $2300 because of taxes. I would not want to do that either. So don’t. You did not state whether or not the company has a 401k match, but placing it in the 401k is much better than losing half of it to taxes. By doing this, you are still getting the complete benefit of the full bonus amount.

In terms of paying off your home, all other found money can be put towards paying the mortgage down, like tax refunds. The average person receives a tax refund of about $3,000 so that is a good amount to put towards the mortgage every year if you get a refund. Also, at the end of the year make an extra mortgage payment. That extra payment really adds up. By making 13 payments a year, you could knock 4 to 5 years off of your mortgage payment. This would save you thousands of dollars in interest.

For example, a $200,000 30-year mortgage with an interest rate of 5% would be over $180,000 in interest with just the 12 payments, but if you make that one additional mortgage payment, the loan would be finished in 26 years instead of 30 and you would pay about $150,000 in interest, which is a huge savings.

And one more thing to consider, since you have no other debt, maybe refinance your mortgage from 30 years to 15 years. If you can comfortably afford this and you know at 34 that this will be the home you plan to stay in, you could be done with your mortgage payments by 50 years old. How this helps you is that you would no longer have a mortgage payment and at 50 you can now use that money to increase contributions to retirement accounts. The contribution limits to IRAS, 401(k) plans, and other tax-advantaged retirement savings plans are higher for those age 50 and older. If you have kids by this time, you can increase contributions to the savings for their education.

Take some time to think about this, only do the 15 year mortgage if you can comfortably afford it. Your mortgage payments will be higher. You may want to start with just making 13 payments a year on the mortgage. Remember, you are only 34 years old, there are so many things to do in life, like travel, if you start making the extra mortgage payment, you are still setting yourself up to pay the mortgage off early. Revisit the 15 year mortgage when your 40. You would still only be 55 and can still take advantage of the increased retirement contributions.

Good Luck!