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What are the best strategies for putting a year-end bonus to good use? Some questions people ask is whether they can use it for something fun or if it’s better to apply it towards reducing debt, or even to start an emergency fund. This article touches on these options and more.
Many companies earmarked year-end bonuses earlier in the year, while the markets were on an upward trend. As such, you may find yourself fortunate to receive a year-end bonus for the year.
Shelve for a moment your visions of exotic trips and instead evaluate how to make the most of this extra money.
A year-end bonus remains taxable income and it’s a good decision to use it responsibly. That doesn’t mean a little can’t be enjoyed but keep priorities in mind. Consider these ideas:
Tackle debt first. Using a bonus to accelerate debt repayment is smart, especially when putting extra funds towards any debt that carries the highest interest rate: the higher the rate, the more money balances cost over time.
For those who aren’t sure, call the credit card companies to find out which card has the highest rate. Not sure about student loan rates? Log in to the account at studentloans.gov, where the details can be reviewed.
Set up an emergency fund. It’s a good idea to establish an emergency one, and these extra funds are an easy way to get it started. Create it in a liquid account (meaning the money is easily and quickly accessible and where it’s easy to add to it). An emergency fund is protection from stumbles that might bust the monthly budget, such as sudden job loss.
A good goal for an emergency fund is three to six months of expenses, for those earning a regular, dependable paycheck. For those whose income or job situation is less stable or less predictable, consider six to twelve months of expenses.
Also consider setting aside money for other expenses that are difficult to plan in a budget. For example, set up a separate account to cover car or home repairs, a health savings account (for unpredictable medical bills) or just set aside money in your savings account for medical care. Some pet owners maintain pet emergency funds to cover veterinary bills.
Max-out the 401(k) or individual retirement account. Using a bonus to maximize annual 401(k) contributions may not seem like a lot of fun now, but this saves for the future, reduces taxable income this year and takes full advantage of job’s benefits. Another option is to talk with a financial professional about funding an IRA or Roth IRA.
Invest in yourself. What about investing in increasing your own productivity, happiness or knowledge? There are a variety of classes at local colleges and community centers. Consider continuing a formal education or simply adding to current skills.
Splurge wisely. An increase in funds often enables people to build security and stability but it might also bring a little happiness when spent wisely. Consider a small splurge on an experience with family or close friends.
For those who aren’t sure what to do with a year-end bonus, dividing it into different buckets is a smart way to handle the increase in funds. Putting 50% towards debt, 30% towards savings and then using the remaining 20% for a splurge will touch on all the categories. But ultimately, the best use of a bonus depends on your individual needs and goals. Be mindful on what matters the most to you and then make a plan.
