Now that 2007 is behind us and we’re a little ways into the new year, many people will be receiving year end bonuses and the like from their employers. Some of these bonuses could be considered enormous (if you look at some Wall Street firms) and others are a little more modest. Whatever the size of the bonus, there are smart things to do with it, and there are some not so smart things. I’ll explore both sides of the coin here.

Smart Bonus Moves

1. Start or enhance your emergency fund. I know, how boring. You just got a chunk of change and all you do is transfer it into an account where it’s going to just sit there. Well, sometimes boring is what’s best. And once you start to see the balance of your emergency fund continue to grow, it will get more exciting I promise.

2. Beef up your retirement accounts. This is a little more eventful since you’ll most likely be investing the balance in some sort of fund or possibly even stocks. Even if the bonus is paid out to you before being able to put it into your 401k, you can change your contribution amount that is deducted from your paycheck until the balance has been fully transferred. Keep in mind that you can contribute $15,500 to your 401k, $4k to an IRA for 2007, and $5k to an IRA in 2008. If you’re over 50 you can make catch-up contributions, but all that is for another post. Your Retirement accounts would be a great place to stash this extra windfall.

3. Pay down/off your debts. Here we go with another boring idea. It can also seem as if you never even got a bonus since it all went to pay off what you already have. So use this as the opportunity to rid yourself of the debt millstone and remember what it was like when you could keep your entire paycheck for yourself instead of handing a portion of it over to [insert favorite bank/lender here].

4. Invest in something. I’m not going to specify what sort of investment since we all have our preferences and different risk tolerances. I wouldn’t have a problem using it as a down payment or partial down payment on an investment property. Others may prefer to throw it in the stock market or try their hand at forex trading. Whatever your inclination is, give it a shot and put the money to work for you.

5. Start your own business. If you’ve ever thought about starting a business, there’s no better time than the present as they say. All you’ve got to do is check out Inc. Magazine to see how many businesses have been started with almost nothing. This isn’t the right thing for everyone, but I know there are some out there that have always wanted to and are just trigger shy. Give it a go.

Stupid Bonus Moves

1. Buying a new big screen TV. You could also substitute whatever gadget or toy you’d like, but the point is the same. Why would you go blow this extra money right out of the gate when you have the opportunity to greatly improve your financial situation? I see this one happen all the time and I always just have to shake my head.

2. Going for broke at the casino. I actually heard of someone that was going to take their bonus and head to Vegas for a weekend and just blow it all. There weren’t even any hopes of winning; he just wanted to blow it. I hope he takes a lot of pictures since the memory will be all he has after he loses the camera in a poker game. Unbelievable.

3. Splurging on some fancy restaurant. I wouldn’t mind if you wanted to treat yourself to something like the Big Deal from Jack in the Box, but going all out at some swanky place where you pay more and more for less and less food is something I don’t understand. There are much better ways to utilize your bonus money. If you just have to celebrate by going out to eat though, at least be savvy about it and use Restaurant.com to get a great discount.

4. Making a down payment on a new car. You might say that it’s good to put the money down on a car so that you don’t have to finance it 100%. But what’s wrong with your current car? If you actually need to get a new car (and I don’t actually mean new) there might be an exception here, but I would seriously evaluate the supposed inability of your current car to get you from point A to point B.

5. Doing anything that does give you actual value. This is kind of a catch all for thoughtless consumer spending. Does any of it add to your bottom line and increase your net worth? Will it help you reach your financial goals and ultimately allow you to spend more time with friends and family or doing what you love? These are just some of the questions you should ask yourself before hastily going out and spending that bonus.

So there you have it. 5 smart things and 5 stupid things to do with your bonus (or any lump sum payment for that matter). If you’ve got any other suggestions or something to add, let us hear about it in the comments.

Before I can really talk about managing your free cash flow, you’ve got to know what it is and how you can acquire some. Wikipedia defines free cash flow as:

cash flow available for distribution among all the security holders of a company.

As I’ve talked about before, if you view your personal finances as a business, you’re the sole shareholder of your “company”. Therefore all of the free cash flow belongs to you.

Essentially, it is the money that is available to you from your income after you’ve paid all necessary expenses. If you’re budget is constantly tight, you’re not going to have much cash flow to manage and you’ll need to come up with ways to increase your free cash flow. This can be accomplished in one of two ways: by increasing your income or reducing your expenses. It sounds simple enough, but coming up with specific action plans for this can sometimes be difficult.

I’d also like to mention that I’ve seen far too many people concentrate solely on reducing their expenses. While this is good to do, it leaves out the other side of the equation which would help speed you on your way to your ultimate financial goals. Don’t forget to also spend some time trying to increase your income as you also focus on reducing your expenses.

Once you have managed to free up some cash flow, you’re going to need to know what you ought to do with it. This is where so many people get in trouble because their are so many choices and everyone is vying for a piece of what you’ve got. I break down all of these choices into four basic categories to simplify things:

• Pay down debt
• Save
• Invest
• Spend

These aren’t in any particular order, but I wouldn’t put Spend near the top of the list, although that’s what most people do with it. You’ll have to decide what is best for your personal situation to do with the money that’s available to you. Establishing an emergency fund may be high on the priority list for some, while others may look to invest because they’ve already got an emergency fund. You may choose to allocate your funds equally among all of the categories so that you’re making headway on all fronts. Whatever you do though, make sure that it’s a conscious decision with your goals in mind.

If it helps you, try to think of your finances like a business (like I mentioned earlier). By doing this you’ll want to increase and manage your free cash flow so that it provides the most growth and benefit to your overall finances. So take some time to figure out what your current cash flow looks like and how you can increase it so you can allocate it how you best see fit.

I believe that there are two main methods by which people save money, that is if they save any money at all. But one of the ways is definitely better than the other. If you’re really serious about saving some money this year and improving your finances, you might want to change the way you approach savings.

Most people get paid at some sort of regular interval and will use the money to take care of necessary expenses, bills, and then for other things that they want. After all this is paid for, they may then save what is left over. While this is one method of saving, it unfortunately leaves money on the table. Our natural tendency is to spend money that we have and we’re pretty good at it. If we’re waiting to put money away into savings until after we’ve spent money on everything else, it’s highly likely that there won’t be much to save.

In order to improve our saving process from what is explained above, we just need to change the order in which we do things. The first thing we need to do after getting paid is to put a certain amount into our savings. Once this has been taken out, we’re then free to spend the rest on our bills and other things that we want. By doing it this way you will guarantee a specific savings rate. You will also save more than you otherwise would have because when you run out of money to spend, you’ll just have to stop spending it. You will have forced yourself to think ahead and better plan out your spending and expenses.

It’s a very simple process to save, yet so many people fail miserably at it. And all you have to do is follow a few simple steps. It really is this simple.

• Get paid
• Put a percentage into savings
• Spend the rest

To get started with this process, just open up a High Yield Savings Account with ING Direct and you can make these simple transfers. This is what I do, so obviously I highly recommend it.

It’s been quite some time since I talked about the concept of delayed gratification, and I figured it was time that I revisit it. It’s an important part of the wealthy mindset and something that we all need to work on.

We live in a high consumption society and we’re bombarded everyday with advertisements of what we should be and how we can buy/finance it now. There is also a lot of pressure from those around us to spend more money and buy more things. Once you recognize this, you can decide to ignore it and focus on your own goals.

I have also noticed that it’s a lot cheaper to get some of the things that I’ve wanted by waiting and not constantly dwelling on them. As an example, we’ve been wanting a wireless router for our house so that we could have a more stable internet connection when we’re out in the front room (we had been using a neighbor’s weak signal). We hadn’t bought one since we were technically able to do without. But this Christmas we were fortunate enough to get a router as a gift from my wife’s parents. It was great because we got something that we really wanted, and they were able to give us something that they knew we would like.

I have also a Nintendo Wii for quite some time now, pretty much ever since I played one for the first time at a friends house. Again though, we didn’t buy one since it wasn’t really necessary and didn’t fit into our overall financial plan. So guess what my parents decided to get us for Christmas? We didn’t have to pay for it and we still got what we were wanting.

Now I know that these are both Christmas examples, and Christmas only comes around once a year. But I have also been able to pick up certain things at extreme discounts just by waiting until I saw them on sale or by some other means. You won’t always know by what means you’ll be able to get what you’re after, and it may be quite some time before you do. Eventually though, you’ll be able to get what you want because you were diligent early on with your savings and investments.

Do you have any stories of how you have benefited from delayed gratification? If so, we’d love to hear about them in the comments.

I’ve been to a few different people’s houses recently for various activities, and something struck me the other day. I have noticed all of the beverages that people have available at their houses. There all different kinds of sodas be it Pepsi products, Coke products, or some other brand. There are also all of the different kinds of beer. And then there are those who have to have a glass of wine in the evening or at some other time.

I’m sure it’s no secret where I’m going with this. It can’t be all that cheap to always have these beverages in the house. Wine can be pretty expensive, especially if you’re pretty picky about it. Beer doesn’t come cheap either no matter which kind you buy. And the cost of soda can really add up after a while as well.

If you’re familiar with David Bach, then I’m sure you’ve heard of his “Latte Factor”, and this isn’t really any different. It’s just applied to something else. I’m not going to go through all the math of what you could save and how much it would be worth in 40 years (I’m not a big fan of those calculations), but I’m sure it would be significant. I mean, soda alone is about $3 per 12-pack and that can really add up after a while.

So what ever happened to just drinking water? And I’m not talking about bottled water which can also be expensive. It’s pretty much free and is probably the most healthy thing for you.

I’m also always amazed when I hear that someone’s finances are stretched so thin, yet I see all of the beverages that they absolutely must have. I’m not trying to say that we should never drink some of these things, but I do want to mention that it can be a significant cost to us. You can also save quite a bit on your restaurant bills if you’d order water instead of something else. Just something to keep in mind.

So much has been written on the topic of saving money. You can find articles talking about how to save money, ways to save money, and the benefits of saving money. It would seem that this is one area of personal finance on which everyone could agree. But that’s not the case. There is a contrarian viewpoint however, that one ought to at least consider before deciding what is best for their situation.

There are those who don’t really believe in saving money. It’s not that they think it should just be spent frivolously, but that there are better things to do with it than just saving it and having it sit there. Just take a look at the following quote.

“There is nothing in saving money. The thing to do with it is to put it back into yourself, into your work, into the thing that is important, into whatever you are so much interested in that it is more important than money.” -Henry Ford

As you can see from this statement, it’s possible that investing in yourself and trying to further your own efforts may be more beneficial than putting your money in some account at a bank. It’s apparent that this statement from Ford has an entrepreneurial slant to it, but you get the idea nonetheless.

This belief, as some may think, is not just a passing thought from Henry Ford. This is something that he really believed in. It is also interesting to read another quote from him on the same subject.

“Old men are always advising young men to save money. That is bad advice. Don’t save every nickel. Invest in yourself. I never saved a dollar until I was 40 years old.” -Henry Ford

Whatever your thoughts are on this subject, I think it’s at least interesting to see a different perspective. Maybe you’ll want to continue on the same path that you’ve always been on, but you may also want to include this advice in your plans, at least to some extent.

1. Cash Money Life gives us 25 Ways to Save Money. Not all of the ideas are applicable for everyone, but you may find a few items of interest. If you find one new way to save then it was probably worth the read.

2. Frugal Journey presents even more money saving tips in the article, 36 Important Money Saving Tips. If you haven’t found a new idea by now, you’re probably a personal finance blogger yourself or you didn’t actually click on the link and read the article.

3. If you’re not into long lists of tips, then you might enjoy reading a different perspective on Why the Rich Get Richer. Instead of just thinking of this as information about the rich however, try to see if you can find something that you can apply in your own life. Who knows, maybe you’ll someday join the ranks.