A bonus at work is not a sure thing but landing one can be a great thing. Sometimes the hard part is knowing what to do with your bonus money. Whether it’s a year-end perk or a recurring reward, here are some important ways to think about and use your bonus:
Remember That It’s Not a Lottery Ticket
When deciding what to do with your year-end bonus, be careful not to treat it as if you won the lottery or got a prize that you weren’t expecting. When money feels like an addition to your bank account, you’re more likely to feel like you can spend it. To figure out what to do with your bonus money, treat it as earned income, because you worked for that bonus.
Avoid Frugal Fatigue
Smart uses for a year-end bonus can help alleviate “frugal fatigue,” the state of exhaustion from pinching pennies that’s commonly felt by anyone on a budget. Those 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. It’s a good idea to take between 10 to 25% of your bonus and use that for yourself, positive reinforcement that you can enjoy a little bit of your money makes it possible to keep working hard.
Make A Financial Plan
After setting aside funds for a small treat, you can use the remainder of a work bonus as an opportunity to meet your larger financial goals. 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.
Pay Off Debt
If you have high-interest debt looming over you, bonus money can be a way to make a dent in the balance and possibly pay off the debt entirely. Credit card debt is likely to cost you the most in interest, so that’s a great place to start.
Pay Down Your Mortgage
Using a portion of your bonus to make an extra payment is one way to make progress and save money. For example, an additional one-time $2,000 payment on a $200,000 mortgage could knock three months off the loan and save approximately $1,400 in interest.
Contribute To Retirement Accounts
Your workplace plan may allow you to designate some or all of the bonus to go into your 401(k), which is a great way to save taxes and build your savings. With a traditional 401(k), you contribute money to the account before you pay taxes on it, so it’s as if you’re receiving tax-free money to save for your future. If you’re unable to direct the bonus into your 401(k) before it’s taxed or you’ve maxed out your 401(k), then you might turn to an IRA for additional savings.
Spend Thoughtfully
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. Whether it’s things or experiences, what brings you the greatest amount of happiness for the dollars you spend? Make a conscious choice before you go out and spend.
Invest In Yourself
Is there a skill you’ve always wanted to learn or a skill you need to develop for a job? Using your bonus to develop that skill could be a great way to invest in your future. By investing in a job-related skill, you may be able to set yourself up for a better job later, turning your annual bonus into one that improves your earning potential, too. Personal skills can be a great source of life satisfaction, too.
However you choose to use your annual bonus, decide on something that’s meaningful. It makes a lot of sense to use that extra money to do something that improves your future, reduces your stress around your finances and makes you feel good, too.
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