7 tips for what to do with a year-end bonus

Summary:

• A year-end bonus can help strengthen your finances, whether you save it, invest it or pay down debt.

• Paying down high-interest debt and building an emergency fund can help you feel more in control of your money.

• Investing part of your bonus can support long-term goals such as retirement, education or a future home.

• Create a plan before spending your bonus. This helps ensure it supports both your immediate needs and your long-term financial goals.

A bonus at work isn’t a sure thing. But landing one can be a great thing. Sometimes the only trouble is knowing what to do with your bonus money. Fancy new bag? Weekend getaway? Finally getting that emergency fund started? These are all likely smart uses for a year-end bonus, depending on your situation.

Figuring out what to do with your bonus money is a question you may well have to answer as you succeed at work. Your best move is to plan ahead for any extra cash that could come your way.

Whether it’s a year-end perk or a recurring reward, here are some answers to the question of what to do with a year-end bonus:

A work bonus is extra pay that an employee receives in addition to a salary. It’s typically awarded for successful individual or team performance. Bonus timing and structure can vary by industry, company and even department.

Before you can decide what to do with your bonus money, you’ll need to understand how and when people earn bonuses at your company and whether you’re able to receive one, says Lance Cothern, founder of a financial blog. 

Some employers pay bonuses to all employees when the company reaches its goals. Other companies base the rewards on individual performance (or a combination of both). Your employee policy handbook should include this information, Cothern says. If not, consider asking your boss or someone from your human resources department for more information—including when bonuses are determined and paid out.

No matter how bonuses work at your job, don’t count on one as part of your annual income. Bonus amounts can change from year to year, and sometimes they don’t happen at all.

“You don’t want to get yourself into a position where if you don’t get a bonus, you’re in a financial tough spot,” says David Weliver, publisher of a financial website.

When deciding what to do with a year-end bonus, be careful not to treat it as if you won the lottery or got a prize that you weren’t expecting, Weliver says.

When money feels like an addition to your bank account, you’re more likely to feel like you can spend it. On the other hand, you’re more likely to hang onto money that feels like you earned it.

To figure out what to do with your bonus money, “treat it as earned income,” Weliver says, “Because it is. You worked for that bonus.”

Smart uses for a year-end bonus can help lessen “frugal fatigue,” the state of exhaustion from constantly saving that’s commonly felt by anyone on a budget.

People who feel frugal fatigue most strongly are the least likely to stick to good spending habits when their finances improve, Weliver says. Similarly, young people who are dealing with student loans and credit card balances and focused on getting out of debt as fast as possible can actually get burned out if they don’t treat themselves once in a while.

Enter your bonus. Smart uses for a year-end bonus may include spending some of it on yourself, some of it on bills and other financial obligations and some of it to save or pay off debt, Weliver says.

To start, “it’s a good idea to take between 10% to 25% of it and use that for yourself,” he says. “Positive reinforcement that you can enjoy a little bit of your money makes it possible to keep working hard.”

After setting aside funds for a small treat, you can use the rest of a bonus as an opportunity to work on your larger financial goals.

Financial plans are very important when it comes to the best ways to spend your bonus, Cothern says. “If you don’t have a plan for how you’d use your bonus money, it usually ends up getting spent in small amounts here and there, with nothing left to show for it.”

Although each person may spend their bonus differently, smart uses for a year-end bonus include paying off high-interest debt first, Weliver suggests. After paying down debt, consider starting an emergency fund with a few months of expenses in the bank, Cothern adds. 360 Performance Savings offers a high rate to help your balance grow. Next, consider saving money for retirement or other big goals.

Even if you’re in good financial shape, one of the best ways to spend your bonus is in a thoughtful way, rather than spending it all at once on an impulse purchase, Weliver says.

“Whether it’s things or experiences, what brings you the greatest amount of happiness for the dollars you spend?” he asks. “Make a conscious choice before you go out and spend.”

Smart uses for a year-end bonus may also include contributing to a long-term goal, like buying your own home, starting a business or building a child’s college education fund.

If you’re debating the best ways to spend your bonus, you may find it rewarding to spend it on others. Using your bonus money to donate to charity or spend on others may bring you a sense of happiness no matter how big the bonus is. In some cases, donations may be tax deductible, per the IRS.

When people purchase experiences—such as taking a class or traveling—the resulting happiness can increase over time. That’s likely because we tend to share experiences and memories with others. One way to maximize the joy of spending a work bonus could be to purchase an experience and bring a friend or significant other along.

When you’re still not sure what to do with a year-end bonus, the best idea is to have a plan in the first place. Whether you treat yourself, contribute to long-term financial goals, help others or all of the above, thoughtful spending (and saving) is the best way to spend your bonus.

Before you spend your year-end bonus, think about how it can support your broader financial goals. Whether you choose to save, invest or cover a major expense, having a plan can help you make the most of this extra income. 

Here are some things to keep in mind as you consider what to do with a year-end bonus:

• A year-end bonus can be a chance to make progress toward your financial goals, from growing savings to paying down debt. 

• Consider setting aside part of your bonus for the future. Use the rest to cover expenses or treat yourself to something special.

• Keeping your year-end bonus in a savings account can help protect it from impulse spending, making it easier to stay on track with your financial future.

Don’t let your hard-earned cash sit idle—put it in an account designed to boost your savings and give your future self a head start. Open a 360 Performance Savings account today to grow your savings with a competitive rate.