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How to Spend a Bonus: 4 Things to Consider

Dec 10, 2020 5 min read Kara Perez

Key takeaways

  • How to spend a bonus is a personal choice.
  • You can bolster your financial stability or make progress toward your financial goals.
  • Understanding your financial picture is key to using a bonus wisely.

 

 

Getting a bonus at work is a wonderful feeling—maybe more so this year than ever. But it can be difficult to decide exactly what to do with the extra money. While there's nothing wrong with treating yourself sometimes—despite current restrictions on travel and entertainment—a bonus presents an ideal opportunity to boost your financial health.

Here are four important factors to consider before deciding how to spend or save your bonus.

 

  1. 1. Your personal goals

    What are the three biggest financial goals you're working toward? Pinpointing these before doing anything with your bonus will help you avoid getting distracted and spending the money on something you might not care about in the long run.

    If you're saving for a down payment on a house, putting your bonus directly into a designated account could speed up the process. Or maybe it makes the most sense to use your bonus to replenish your emergency fund or to help you pay back student loans.

    Identifying your three biggest financial goals gives you a framework for how to spend your bonus that's specific to your finances.

     

  2. 2. The size of your bonus

    A $100 perk is very different from a $10,000 windfall. The amount of money you receive should be a big factor in what you decide to do with it. For example, $10,000 could complete a six-month emergency fund, while $100 could allow you to pay off a monthly credit card bill.

    If you receive a bonus large enough to allocate to more than one of your personal goals, prioritize them and consider the current financial standing of each, then divvy up the funds accordingly.

     

  3. 3. The time of year

    Timing can be everything when it comes to deciding how to spend your bonus. Are the holidays around the corner? Your bonus could cover your holiday travel and gifts and thus prevent you from going into any debt.

    A bonus at the beginning of the year might enable you to get ahead on your investing goals for the rest of the year.

  4. Meanwhile, an end-of-year bonus gives you a chance to review your year-to-date spending and use the money to fill in any saving or investing gaps. If you haven't yet maxed out your IRA this year, for example, a bonus could help you do so.

     

  5. 4. Your age

    If you're early in your career, a bonus might be well spent lowering your debt or building an emergency fund. If you're a few years into your working life, that same money might be put to better use in an investment account. How you allocate your bonus should change as your financial life changes.

    Deciding exactly what to do with a bonus is a personal choice, but try to avoid letting it go to waste by parking it in a checking account or spending it on things that don't move you forward. Ideally, your bonus should help you work toward your big-picture goals.

     

What you can do next

Review your personal budget and financial goals so you're clear on where you want to allocate your money. Try to use the bonus to strengthen your financial security. Consider whether the money would be best spent invested, saved or used to pay off debt. Get clear on your goals and build an action-oriented money plan.

Kara Perez is a freelance writer who focuses on personal finance, and is the founder of Bravely, a financial literacy platform.

 

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