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How I'll Spend a Bonus

Not wanting to be like all those companies who pay bonuses around Christmas, my employer pays bonuses about a month later. This is a cash-heavy time of year for me because in addition to two ordinary bonuses — about two weeks apart — this is also the time of year when the employee stock purchase program buys shares.

To minimize taxes, I always hold my ESPP shares for two years, then sell them to diversify. Selling these shares increases my cash holdings in the short term.

At the beginning of the month I noted that I was already quite cash-heavy. My upcoming bonuses and stock sale will exacerbate the situation. But I have a plan.

The standard advice about what to do with a large chunk of cash doesn't apply to me, because it usually consists of nuggets like "pay off your credit cards" and "contribute to your Roth IRA". All my credit card debt is at 0% or 1.9%, and I'm happy to have this debt because I'm doing credit card arbitrage. I'm already maxing out my Roth and my 401(k), so I can't put the money there. And I don't want to pay down my mortgage because it's only at 5%. Finally, I don't need to buy a new car because I just did that.

In short, I need to invest this money in an ordinary, non-retirement, non-tax-advantaged way. I decided that I'd like to hold 5% of my "investable" net worth — i.e., excluding my house — in cash. This comes to roughly $11,000, which is satisfyingly close to the "$10,000 emergency fund" guideline I've been following for years. That means I need to invest about $15,000 of cash I already have, plus everything that comes in through bonuses and ESPP sale.

First, I'm reducing the magnitude of my extra cash by diverting half of the bonuses into my 401(k). That money will be contributed toward my retirement portfolio that my financial advisor just helped me rebalance in December. (My Roth IRA is through Edward Jones, and my advisor guides me with my 401(k) even though he doesn't get a commission on that.) I want to invest my cash on my own because I don't want to pay anyone a commission on it.

Today I have less than $50,000 in the form of self-directed, non-retirement, non-employer-related, non-real-estate, non-cash assets. (I should call them "ordinary investments".) I want to make good decisions about the cash I'll be investing soon.

This brings me to my second step — education. One of the benefits of working at a very large company is that there's a lot of self-paced web-based training available. And even though I'm an engineer, there's nothing preventing me from taking a bunch of classes intended for a finance audience. These classes are either free or available for a nominal fee (<$100) that my manager happily agreed to pay. I'll be taking these classes over the next few weekends. This is cheaper, faster, and more convenient than attending "real" classes at a community college. I've already taken one of these classes and thought it was worthwhile, so I'm committed to doing the rest.

My goal is to learn enough over the next few weeks to be a reasonably savvy investor, ready to invest my cash pile in something worthwhile.

Or, if this doesn't work out, maybe I'll build a giant money bin and go swimming in it.

UPDATE 2006-01-22 06:54:50 UTC: Plan "C" is to find a beautiful woman to invest it for me.

Tiny Island