Pay down debt
Credit card debt often balloons this time of year, as Americans turn to plastic to help finance their holiday shopping. Eliminating high-interest debt, no matter when you racked it up, is a great way to use your bonus to better your financial situation.
Paying off debt that carries a 16.43% interest rate (the current average for credit cards, according to the Federal Reserve Opens in new window) guarantees a return you can’t beat with any other type of investment. Plus, once you’ve gotten rid of that debt, you’ll have more discretionary income each month to enjoy, and likely a higher credit score as well.
Focus on the account that has the highest interest rate. Once that amount is paid off, shift any extra income toward paying off the account with the next-highest rate. Paying off student loans or your mortgage may also be a worthwhile goal, but since those loans typically have lower rates and some tax benefits, you may want to focus on other financial goals first.
Set up an emergency fund
Maintaining a rainy-day fund is essential to your long-term financial security. If you get hit with an unexpected expense like a car repair or an ER visit, you’ll have easy access to the cash if needed to pay it off. That cushion means that you’re less likely to run up additional debt on your credit card or turn to other sources of cash, such as a 401(k) withdrawal, which can have long-term consequences.
Aim to have three to six months’ worth of nondiscretionary expenses in your emergency fund. You’ll need less money if you’re single without dependents and secure in your job, and more if you’re supporting a family or working in the gig economy.