If you’re among those who will get a bonus as this challenging year comes to an end, congratulations! While doing a great job can be its own reward, getting a financial windfall in recognition of that work feels great too!
It can be tempting to spend that cash on post-holiday gifts or a winter getaway to someplace warm. But rather than simply spending your bonus, plan to use it in a way that moves you toward your financial goals and reduce your stress for the rest of the year. That doesn’t mean you can’t have any fun with your bonus. Set aside a portion of the cash (say, 25% or so) for a much-deserved splurge, then consider using the rest of the money for one of the following:
- Pay down debt. Credit card debt often balloons this time of year, as Americans turn to plastic to help finance their holiday shopping. Eliminating high-interest debt, no matter when you racked it up, is a great way to use your bonus to better your financial situation. Focus on the account that has the highest interest rate. Once that amount is paid off, shift any extra income toward paying off the account with the next highest rate. Paying off student loans or your mortgage may also be a worthwhile goal, but since those loans typically have lower rates and some tax benefits, you may want to focus on other financial goals first.
- Create an emergency fund. Maintaining a rainy-day fund is essential to your long-term financial security. If you experience an unexpected expense like a car repair or an ER visit, you’ll have easy access to the cash if needed to pay it off. That cushion means you’re less likely to run up additional debt on your credit card or turn to other sources of cash. Aim to have three to six months’ worth of nondiscretionary expenses in your emergency fund.
- Save for retirement. Aim to max out your savings in tax-deferred retirement accounts. In 2021, you can stash up to $19,500 in your workplace 401(k) or similar plan ($26,000 if you’ll be at least 50 by year-end). Even if you’re unable to hit your savings limit right now, anything you can set aside can help set you up for a more secure retirement. Try to increase the amount you save each year.
- Put it toward short-term goals. If you’ve paid down high-interest debt and are on track to meet your emergency and long-term savings goals, you can think about how your bonus can help you prepare of a short-term goal, such as buying a new car or renovating your home. Figure out exactly how much you’ll need to make your goal a reality and set up a separate account just for that purpose. Designating a specific amount for a financial goal will help you avoid the temptation of tapping into those funds for discretionary spending.
What’s next?
Look at your overall finance to figure out the best way you can use your bonus to help meet both short- and long-term money goals. If you’re feeling overwhelmed, consider sitting down with a financial advisor who can provide advice based on your specific circumstances.
