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Put a Bonus to Work This Holiday Season

Nov 30, 2020 3 min read Beth Braverman

Key takeaways

  • Set aside a small portion to treat yourself.
  • Get rid of high-interest debt.
  • Save for short- or long-term goals.

 

If you’re among those who’ll get a bonus as this challenging year comes to a close—as one-third of U.S. companies say Opens in new window they’ll give to all employees—congratulations! While doing a great job can be its own reward, getting a financial windfall in recognition of that work feels pretty great, too.

It can be tempting to spend that cash on post-holiday gifts or a winter getaway to someplace warm. But rather than simply spending your bonus, make a plan to use it in a way that moves you toward your financial goals and reduce your stress for the rest of the year. That doesn’t mean you can’t have any fun with your bonus. Set aside a portion of the cash (say, 25% or so) for a much-deserved splurge, then consider using the rest of the money for one of the following:

 

 

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.

 

 

Save for retirement

Prudential’s 2020 Financial Wellness Census found that nearly half (48%) of Americans are worried about their financial future. The first step toward ensuring yours is to start saving for retirement as early as possible.

Aim to max out your savings in tax-deferred retirement accounts. In 2021, you can stash up to $19,500 in your workplace 401(k) or similar plan ($26,000 if you’ll be at least age 50 by year-end). Even if you’re unable to hit your savings limit right now, anything you can set aside can help set you up for a more secure retirement. Try to increase the amount you save each year.

 

Put it toward short-term goals

If you’ve paid down high-interest debt and are on track to meet your emergency and long-term savings goals, you can think about how your bonus can help you prepare for a short-term goal, such as buying a new car or renovating your home. Figure out exactly how much money you’ll need to make your goal a reality, and set up a separate account just for that purpose. Designating a specific account for a financial goal will help you avoid the temptation of tapping into those funds for discretionary spending.

 

What you can do next

Take a look at your overall finances to figure out the best way you can deploy your bonus to help meet both your short- and long-term money goals. If you’re feeling overwhelmed, consider sitting down with a financial advisor who can provide advice based on your specific circumstances.

Footnotes

Beth Braverman is a freelance writer covering personal finance, parenting and careers. Her work has appeared in dozens of publications, including Consumer Reports, CNBC.com and CNNMoney.com. She lives with her family in Westchester County, N.Y.

 

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