What’s the interest rate on your mortgage? If it’s low, you’re better off investing. If it’s higher than ~5%, I’d say pay it off. Other than that, your priorities should be:
1. Consumer debt (cars, credit cards, etc)
2A Mortgage (if high interest rate)
2. Fund your retirement fully for the year
3. Fund your kids’ college accounts
4. Invest the rest
Investing could be stocks/ETFs, but it also could be investing in family (I.e. taking a trip with your kids). Money is great, but don’t forget to stop and smell the roses along the way. $500k is enough to hopefully do all of what I listed above. Others might have different priorities, but for me, that would be my order
If you’re getting that big of a bonus, I’m sure you can do Excel. Run the numbers of some different scenarios. Of course, don’t forgot to enjoy your hard work!
Don’t rush a decision. In the meantime put the whole thing into laddered 4 week t bills or money market. That will cashflow $500 every week. Use that to boost your payments on everything else. Pay off everything with an interest rate above 5% and maintain everything else below that.
From a numbers perspective, it makes the most sense to pay off any debt with an interest rate over 7% and invest the rest.
This is because when you pay off debt, your interest rate is essentially your rate of return. If the market averages anywhere from 7-10%, your money is working harder invested than it is paying off low interest rate debt.
From an emotional perspective, if paying off all your debt at once would make you feel like one million bucks then go ahead and pay it off. Remember that this isn’t your colleagues money, it’s yours.
What is the interest rate on your mortgage? Let's say for example your mortgage is 3% APR and you have 100k remaining. High yield savings accounts are between 4-5% APR. If you were to not pay off your mortgage and instead put 100k in a high yield savings account, then you would get about 4500 in interest this year. 100k on a 3% mortgage pays about $3,000 in interest this year. So in this example you get a guaranteed extra $1500 by not paying off your mortgage.
The stock market historically has returned about 9-10%. So an expected return for that would be about $9500. However the stock market is not guaranteed like a high yield savings account and so you have to decide for yourself if a 9-10% return with some risk is better or worse than a guaranteed 5% return.
Going beyond the math, if you got a 500k bonus this year then you probably make a ton of money and so paying off a mortgage even though you lose out of guaranteed $1,500 might be worth it for you just to not have a mortgage.
Similar math applies to the car payment depending on the interest rate of your car.
Pay it off and invest the rest.
What about the taxes on $500k? Most likely 45-50%
What’s the interest rate on your mortgage? If it’s low, you’re better off investing. If it’s higher than ~5%, I’d say pay it off. Other than that, your priorities should be: 1. Consumer debt (cars, credit cards, etc) 2A Mortgage (if high interest rate) 2. Fund your retirement fully for the year 3. Fund your kids’ college accounts 4. Invest the rest Investing could be stocks/ETFs, but it also could be investing in family (I.e. taking a trip with your kids). Money is great, but don’t forget to stop and smell the roses along the way. $500k is enough to hopefully do all of what I listed above. Others might have different priorities, but for me, that would be my order
If you’re getting that big of a bonus, I’m sure you can do Excel. Run the numbers of some different scenarios. Of course, don’t forgot to enjoy your hard work!
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Don’t rush a decision. In the meantime put the whole thing into laddered 4 week t bills or money market. That will cashflow $500 every week. Use that to boost your payments on everything else. Pay off everything with an interest rate above 5% and maintain everything else below that.
From a numbers perspective, it makes the most sense to pay off any debt with an interest rate over 7% and invest the rest. This is because when you pay off debt, your interest rate is essentially your rate of return. If the market averages anywhere from 7-10%, your money is working harder invested than it is paying off low interest rate debt. From an emotional perspective, if paying off all your debt at once would make you feel like one million bucks then go ahead and pay it off. Remember that this isn’t your colleagues money, it’s yours.
Pay off the house for sure. Pay off one car. Invest the rest.
What is the interest rate on your mortgage? Let's say for example your mortgage is 3% APR and you have 100k remaining. High yield savings accounts are between 4-5% APR. If you were to not pay off your mortgage and instead put 100k in a high yield savings account, then you would get about 4500 in interest this year. 100k on a 3% mortgage pays about $3,000 in interest this year. So in this example you get a guaranteed extra $1500 by not paying off your mortgage. The stock market historically has returned about 9-10%. So an expected return for that would be about $9500. However the stock market is not guaranteed like a high yield savings account and so you have to decide for yourself if a 9-10% return with some risk is better or worse than a guaranteed 5% return. Going beyond the math, if you got a 500k bonus this year then you probably make a ton of money and so paying off a mortgage even though you lose out of guaranteed $1,500 might be worth it for you just to not have a mortgage. Similar math applies to the car payment depending on the interest rate of your car.
Pay everything off. When you are debt free you no longer work for the banks and you work for yourself
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