As the economy adds more jobs every month and businesses continue to grow, you may find yourself in a fortunate position: receiving a year-end bonus. Before visions of exotic trips start dancing in your head, let’s take a step back and evaluate how you can make the most of this extra money.
Don’t treat this as an excuse for a (mindless) splurge. Your year-end bonus is still taxable income and you can make smart decisions to use it responsibly — just like all your other paychecks.
That doesn’t mean you can’t have a little fun, but keep your priorities in mind. By having a plan in place before you receive that bonus check, you can make progress on financial goals and give yourself a small reward for your hard work.
Consider these five ideas to put your year-end bonus to smart use this year:
Tackle Debts First
It might not sound too exciting, but using your bonus to accelerate your debt repayment is a smart money move. If you want to make the most it, put your year-end bonus toward your debt with the highest interest rate.
This method of debt repayment is called the “avalanche method,” and it’s financially effective because the higher the rate, the more money those balances cost you over time. Paying off those debts as soon as possible means you pay less in interest in the long run.
Call your credit card companies if you’re not sure which card has the highest rate. Not sure about your student loan interest rates? Log in to your account on studentloans.gov. Each of your loans will be broken down into a list of information, including the interest rates you’re paying.
Set Up an Emergency Fund and Save Up for Irregular Expenses
If you don’t already have an emergency fund, now is the time to create one and contribute to it. Your emergency fund is designed to protect you from situations that would normally bust your monthly budget – and from worst case scenarios, like a sudden job loss. Put your year-end bonus into a liquid savings account and earmark that money for unexpected expenses.
Aim to put away three to six months’ worth of expenses in your emergency fund if you’re an employee with a regular, dependable paycheck. If your income or job situation is less stable or less predictable, consider putting away six months’ to twelve months’ worth of expenses instead.
You might also want to think about setting aside some money for other specific or irregular expenses that are difficult to budget for. You can put money in a separate account to cover car or home repairs when an issue crops up. You could consider setting up an Health Savings Account, or just set some extra money in your own savings account to help cover medical care. Some pet owners even have a “pet emergency fund” to cover those costly vet bills.
Max Out Your 401(k) or IRA
It’s never too early to get serious about investing. We’ll assume you already contribute to a retirement account on a regular basis – but you could think about using your year-end bonus to do more.
Using your year-end bonus to max out your 401(k) is an excellent way to contribute to your future, reduce your taxable income, and take advantage of all your company benefits. If your employer doesn’t offer a 401(k) option, you can use your bonus to open or help fully fund an IRA.
And of course, you can still use your bonus to open and fund another retirement account even with a 401(k) or similar employer-sponsored plan. If you don’t already have a Roth IRA, get one today. If you do contribute but won’t hit the max, use your bonus money to do so this year.
Invest in Yourself
Financial professionals spend a lot of time talking about investing your money to work harder for you, but what about taking the time to invest in yourself to increase your productivity, happiness, or knowledge?
Use your year-end bonus to invest in yourself by taking a class, continuing your education, or adding to your skill set. If you possess the drive to learn and improve, you may even be able to market your newly acquired knowledge or skill as a side hustle to earn more money and increase your ROI.
Enjoy a Splurge (But Make Sure It’s the Right Kind)
We’ve finally made it to everyone’s favorite suggestion: splurging! You can and should splurge a little. Money can allow you to build security and stability, but it can also buy some happiness when you put it to good use: spending on experiences and relationships (not stuff).
Use your bonus to take you and a loved one or two on a fun trip you might otherwise skip. Go to an event that you’ve always wanted to attend. Spread out your splurge and plan for one fancy date night a month for the next three months. Travel to visit a friend or family member you haven’t seen in too long.
Spending money isn’t a bad thing, and you don’t have to squirrel away every last cent of your bonus. But do practice mindful spending, and work to align it with what you really value. Don’t let someone else’s priorities dictate how you spend money – in other words, don’t buy something you don’t need simply because someone else told you it was important or you needed it.
If you prioritize what’s important to you and spend your money on that, you can enjoy a smart splurge with your year-end bonus.
Can’t Choose Among These Options?
Choosing the “best” avenue for your bonus can be a challenge. That’s because your best option will be unique to you and your financial goals, wants, and needs.
You may have debts to tackle, an emergency fund to top up, and a camping trip you’ve been wanting to take. Don’t feel as if you have to choose among them. Instead, consider dividing your money to go towards each. Work in percentages to address multiple priorities and goals, perhaps 50% to debt, 30% towards savings, and 20% to splurge.
Ultimately, the best use for your bonus will depend on your individual needs and goals. Choosing one of these ways to put your extra money to good use will help you get started in the right direction.