When an annual bonus comes your way, it’s cause for celebration. Everyone loves to see extra cash hit their bank account, and the excitement can make it easy to blow your entire bonus on a shopping spree. But a little bit of planning can help you make the most of it.
Let’s explore some smart ways to put this windfall to good use.
In This Article
Build your emergency fund
An emergency fund is your first line of defense against unexpected costs. Without robust emergency savings, an unexpected car repair or medical bill could completely derail your financial plans. But if you have emergency savings, you can tap into those to stay afloat when life challenges you.
Many experts recommend saving three to six months’ worth of expenses in an emergency fund. But having some level of emergency savings is better than nothing. Evaluate your current stockpile. If you aren’t comfortable with your current emergency savings, consider funneling your bonus into this stash.
Pay off high-interest debt
High-interest debt can drain your finances. Depending on your situation, the payment might take a significant portion of your monthly income. If you have high-interest debt, consider using your year-end bonus to pay down debt.
For example, credit cards are notorious for charging high-interest rates. Using your bonus check to pay down your credit card balance could breathe some wiggle room into your budget.
If your bonus check doesn’t cover the entire balance, consider using a debt consolation loan.
Tuck funds into your retirement accounts
Saving for retirement might not cross your mind. After all, it might be decades before you hit retirement age. But building a nest egg to support you in your golden years is a big challenge. With that, it’s best to start saving as soon as possible.
If your employer is willing to match a portion of your retirement contributions, take advantage of the opportunity. Otherwise, consider putting your bonus check in a tax-advantaged retirement account. A few of your options might include a 401(k), Roth IRA, or traditional IRA.
Save the funds in a high-yield savings account
If you have a big purchase on the horizon, saving your bonus check in a high-yield savings account (HYSA) might be a good choice. Instead of letting your savings collect dust, a HYSA allows you to earn a relatively high interest rate on your savings.
Invest in yourself
Not all investments are channeled through a brokerage account. Some of the most important investments you can make are in your own education. With the right skills, you can dramatically transform your earning potential.
Don’t sell yourself short. If you want to further your education or pursue an idea you have for a business, consider investing your bonus money into your dreams.
Spend it on a much-needed purchase
If you’ve been putting off a big expense, your bonus payment presents an opportunity. You can use the funds to finally move forward with a purchase.
For example, you could upgrade your work attire to improve your professional appearance, cover an unavoidable home repair, or make a down payment on a vehicle after breaking down one too many times.
Chip away at debt
If you are tired of carrying high-interest debt, consider using your annual bonus to tackle the balance. Of course, your bonus likely won’t eliminate your mortgage or car loan. However, chipping away at your debt can help you become debt-free faster.
Open a certificate of deposit
If you aren’t planning on using the funds anytime soon, locking up your bonus in a certificate of deposit (CD) is a practical option. A CD is instrumental if you struggle to save. Essentially, a CD locks up your funds for a set time, and in exchange, you’ll receive interest payments.
Treat yourself
An annual bonus is usually the result of a job well done. There’s nothing wrong with using the funds to treat yourself. You worked hard to earn this bonus.
If possible, try to strike a balance between treating yourself now and working toward future financial goals. For example, you might decide to use some of the funds for a vacation and tuck the rest into your retirement savings.
Use your annual bonus to move your finances forward
Everyone has a unique financial position and different goals for their future. While one way to use your bonus isn’t better than the other, carefully evaluating your options can help you determine the best fit for your situation.
Written by Sarah Sharkey and Edited by Rose Wheeler
Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She lives in Florida with her husband and dogs. When she’s not writing, she’s outside exploring the coast. You can connect with her on her blog Adventurous Adulting.
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