Subscribe
Share
Share
Embed
Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast. If you're a high earning professional, business owner, or someone approaching retirement and wondering whether you are truly on track, you are in the right place. This podcast is all about helping you make smart, confident financial decisions without the fear, confusion, or sales pressure that so often comes with money advice. Each episode is designed to break down complex topics like retirement planning, investing, taxes, and cash flow in plain English so you can understand what really matters and avoid the most common and costly financial mistakes. Everything you hear here is educational, fiduciary focused, and grounded in real world planning experience working with clients just like you.
Josh:I'm your host, Josh Duncan, partner at F5 Financial Planning. Let's get started. Have you ever received a big commission check, a year end bonus, or a large profit distribution and thought, this is great. Now what do I do with it? That is a good problem to have, but it can still feel overwhelming in the moment.
Josh:Because when a large amount of money hits your account, it creates a lot of temptation and a lot of questions at the same time. Part of you wants to enjoy it. Part of you wants to be responsible. Part of you wonders how much of it is actually yours after taxes. And part of you is afraid of making the wrong decision and looking back a year later wondering where it all went.
Josh:That is why I think it's incredibly important to have a system. Not a complicated system, not a perfect system, just a clear order of operations so that every time a large commission, bonus, or profit distribution comes in, you know exactly how to think through it. I'm Josh Duncan, partner at F5 Financial Planning, where we take a fiduciary approach to maximizing our clients wealth. In this video, I'm going to walk you through a practical step by step framework for how to handle a large payout. We're gonna talk about taxes first, then your emergency fund, then paying off your debt, then setting aside money for major planned expenses, then investing for the future, and finally using some of that money for goals that make life more enjoyable.
Josh:If you follow this order, you will be much more likely to turn that large payout into long term progress instead of short term lifestyle creep. Before we get into the actual steps, I wanna encourage one mindset shift that can make a huge difference. When a large payout comes in, pause before you purchase. Do not treat this money the same way you treat your regular paycheck. Regular income tends to get absorbed into regular life.
Josh:It goes toward bills, groceries, subscriptions, restaurants, random purchases, and normally monthly spending. But a commission, bonus, or profit distribution is different. It is irregular. It is lumpy. It creates a unique planning opportunity.
Josh:And if you do not deliberately assign that money a purpose, it will usually disappear into whatever feels urgent or exciting in the moment. I like to think of a large payout as a team of workers showing up at your house. If you do not give them a job, they will wander around and create chaos. But if you tell each dollar where it needs to go, a lot can get done quickly. So before you celebrate, before you upgrade something, before you make a big transfer into an investment account, walk through these steps in order.
Josh:The first thing you need to do is plan for taxes. This is especially important because different types of payouts are handled differently. If you received a commission or bonus through payroll, some federal taxes and state taxes were likely withheld automatically. That's helpful. But it does not guarantee enough was withheld.
Josh:If you received a profit distribution, that's a different story as no taxes are withheld. That means the amount that lands in your bank account can feel like spendable money, even though a portion of it may already be spoken for. This is one of the most common mistakes I see people make. They look at the deposit amount and mentally treat it like a windfall. When in reality, part of it may belong to the IRS or their state.
Josh:So before you do anything else, review your tax projection for the year. Look at your income so far. Look at what has already been withheld. Look at any other unusual income events happening this year. And ask a very simple question.
Josh:Based on what I expect to earn this year, am I on track with my tax payments, or am I short? If you are short, this may be the time to make an estimated tax payment and close the gap. That is especially important for business owners, self employed individuals, and anyone receiving profit distributions. You do not want tax time to become a surprise just because you assume the money in your account was fully available to spend. I want you to think of this step as protecting the rest of the money.
Josh:Because if you skip taxes and move on to everything else, you can create a problem that eventually forces you to unwind other good decisions. You may have to pull from savings, sell investments, or scramble for cash later. So step one is to figure out what part of this payout is truly yours to keep after taxes. And if you need to make an estimated payment, do it now. It may not be the most exciting use of the money, but it is one of the smartest.
Josh:Once you have accounted for taxes, the next thing to review is your emergency fund. Do you have between three and six months of living expenses set aside? Notice I said living expenses, not income. What you need in an emergency is enough money to maintain your life if income is interrupted. That means housing, utilities, groceries, insurance, transportation, and other core expenses.
Josh:Your emergency fund is not your vacation fund. It's not your car replacement fund. It's not your home remodeling fund. It's your financial shock absorber. And a large commission bonus or profit distribution can be one of the best times to strengthen that reserve.
Josh:Why? Because building an emergency fund little by little out of monthly cash flow can feel painfully slow. But when a lump sum comes in, you have an opportunity to make major progress all at once. If your emergency fund is below where it should be, this is where I would focus And while you are reviewing it, ask one more question. Where is that emergency fund sitting?
Josh:If it's sitting in a checking account earning next to nothing or an old savings account with very low interest rate, now may be a good time to move it to a high yield savings account. That way, the money is still liquid and still doing the job it needs to do, but it can earn a little more while it waits. One common mistake here is skipping this step because investing feels more productive. People think, I don't want cash sitting around. I want the money to grow.
Josh:But your emergency fund is doing something very valuable. It's buying stability. It is helping you avoid high interest debt when life happens. It's helping you stay invested during tough times because you have cash available instead of being forced to sell investments at the wrong moment. This is real financial progress.
Josh:So before you do anything aggressive with this money, make sure your emergency fund is adequately funded and sitting in the right type of account. After taxes and after your emergency fund is in a good place, the next step is paying off debt. This is where a large payout can create real momentum. Debt has a way of stealing from your future. Every monthly payment reduces flexibility.
Josh:Every balance takes a portion of the next month's income and assigns it to the past. And when you have multiple balances hanging around, it can feel like you're running hard financially without making much visible progress. That is why I like using a large commission bonus or profit distribution to attack debt with intention. And in this framework, I want you to focus on the smallest balances first. This is often called the snowball method.
Josh:You list your debts from the smallest balance to the largest balance, and you start knocking them out one by one. Every time you eliminate a balance, you create a win. You free up a payment. You simplify your life, and you build momentum to attack the next one. Now, from a pure math standpoint, some people will point out that paying the highest interest rate first may save the most money over time.
Josh:That can be absolutely true. But personal finance is not only about math, it's also about behavior. And behavior is what drives results. A lot of people do better when they can actually feel progress. Eliminating a small balance completely gives you a psychological win that keeps you moving.
Josh:It's like pushing over the first domino. Once you start seeing progress, it becomes easier to stay consistent. Here's the important caution though. Do not use all of your available cash to pay off debt and leave yourself with no emergency reserve. That's exactly why this step comes after the emergency fund.
Josh:Because if you empty your cash to wipe out debt, and then your car breaks down or you lose income temporarily, there is a good chance you end up swiping the credit card again. Then you are right back where you started. The goal is not just to pay off debt. The goal is to stay out of debt. That is much easier to do when you have some cash reserves in place first.
Josh:So once your emergency fund is adequately funded, start attacking those smallest balances and build some momentum. After taxes, after your emergency fund, and after debt payoff, the next question is whether you have major plan expenses coming up in the next five years. These are not emergencies, but they are also not the fun stuff. These are the predictable practical expenses that tend to show up whether you are excited about them or not. Maybe you will need a newer vehicle in a couple of years.
Josh:Maybe you know a child is getting close to college. Maybe your roof, heating system, or appliances are getting older. Maybe a move is on the horizon. Maybe there are home maintenance items you know will need attention. These are the costs that often feel surprising, even though they were completely foreseeable.
Josh:And this is where a lot of people get into trouble. They skip over this category because it's not urgent today, and they invest all the extra money or spend it on lifestyle upgrades. Then when the planned expenses show up, it feels like a crisis. I want you to think of this category as your near term planning bucket. If you are likely to need the money in the next five years, there's a very good chance that money shouldn't be saved, not aggressively invested.
Josh:Why? Because the stock market is a powerful long term wealth building tool, but it's not a great place for money you know you will need soon. If the market happens to be down at exactly the wrong time, you may be forced to sell when you would rather not. So if you know a major expense is coming, set aside money for it now. This is what turns predictable stress into manageable planning.
Josh:This is the kind of quiet financial stability people often overlook. It's not flashy, but it makes a huge difference in real life. Once you have handled taxes, strengthened your emergency fund, paid off the debt, and saved for major planned expenses, then it makes sense to focus on long term investing. This is the step a lot of people wanna jump to first, and I understand why. Investing feels like the most exciting and productive option.
Josh:But investing works best when the rest of your financial life is stable enough to support it. So what are some smart ways to use a large payout here? Well, one option is making backdoor Roth contributions if that's appropriate for your situation. Another is increasing contributions to your workplace retirement plan like your four zero one k. If you have not maxed out your four zero one k for the year, this can be a great opportunity.
Josh:In some cases, you may be able to increase your payroll deferral percentage and use the bonus or commission to support your cash flow while more of your paycheck goes into the plan. That can be an excellent strategy for boosting retirement savings. Another very good option is investing in a taxable brokerage account. And I wanna pause on that for a moment because taxable brokerage accounts do not always get enough attention. People tend to think in two buckets, retirement accounts and cash.
Josh:But taxable brokerage accounts can be incredibly useful, especially if you want flexibility. For example, if you hope to retire before age 59, taxable investments can help provide a bridge before you access retirement accounts without dealing with the 10% early withdrawal penalty. That flexibility can be valuable for early retirement, semi retirement, career changes, simply having more options. A taxable account also gives you a place to continue investing after you have already taken advantage of your retirement plan opportunities. The key here is making sure this is truly long term money.
Josh:If you need it soon, it probably should not be invested aggressively. But if the money is for future wealth building, this is the point where your commission, bonus, or distribution can start doing real work for the next decade and beyond. Finally, after all those priorities have been addressed, it's okay to use some of this money for goals that make life more enjoyable. And I think that matters. This can be a bathroom remodel.
Josh:It could be a special family vacation. It could be a new set of kayaks. It could be a hobby purchase, a backyard upgrade, or some other goal that genuinely adds enjoyment to your life. Not every dollar has to be allocated to the most optimized spreadsheet answer. Personal finance is not just about accumulation.
Josh:It's also about alignment. It's about using money in ways that support the life you actually wanna live. The key is to do it in the right order. This is a big difference between intentionally setting aside money for a meaningful goal, and mindlessly letting a large payout disappear through random spending. One creates value, the other usually creates regret.
Josh:So yes, I think it's absolutely reasonable to use some of a large commission bonus or profit distribution for something fun or meaningful. But it should come after you have taken care of taxes, cash reserves, debt, near term obligations, and long term investing. That way you can enjoy it without wondering whether you should have been more responsible. One more important point before we wrap it up. Work in a priority order as I've laid out the categories here.
Josh:If taxes need to be addressed, start there. If there is money left after that, move to your emergency fund. If your emergency fund's in good shape and there's still money remaining, then move to debt payoff. From there, you can continue working down the list toward planned expenses, investing for the future. And finally, lifestyle goals.
Josh:Splitting the money between goals for small progress in six places is not as powerful as fully solving the most important problem first. That does not mean you can never use the money in more than one category. It just means you do not start dividing it automatically. You work down the list in order. Handle the most important need first, then ask, do I still have money left?
Josh:If the answer is yes, move to the next priority. That approach creates clearer progress, fewer trade offs, and better financial decision making overall. So if you receive a large commission, bonus, or profit distribution, here's your I would encourage you to follow. First, plan for taxes and make an estimated payment if you need to close the gap. Second, review your emergency fund and make sure it's adequately funded in a high yield savings account.
Josh:Third, pay off debt, starting with the smallest balances first so you can build momentum. Four, set aside money for major planned expenses coming in the next five years. Fifth, invest for the future through strategies like backdoor Roth contributions if appropriate, increasing your four zero one k contributions or using a taxable brokerage account. And finally, use some of the money for goals that make life richer and more enjoyable. When you handle a large payout this way, you are not just reacting to money, you are directing it.
Josh:That is what good financial planning does. It helps you move from excitement and uncertainty to confidence and clarity. And as a fiduciary advisor, that is exactly the lens we want to bring to decisions like this. Not just what's possible, but what is wise. If you found this episode helpful, please consider subscribing to the podcast and leaving a review.
Josh:It helps more people find the show and continue learning how to make smarter financial decisions. I'm Josh Duncan, partnered F5 Financial Planning. If you would like to learn more about how we help our clients achieve financial freedom for personal significance, please visit our website at www.f5fp.com. Thanks for listening, and I'll see you in the next episode.