It’s the holiday season, and many professionals are eagerly awaiting their yearly bonus.
While it’s easy to view the bonus as a windfall and spend it on a whim, most people would benefit from using the money to catch up on their savings, pay off debt or invest more. As a general rule, 25 percent of every dollar should be saved or invested, and bonuses should ideally be thought of in the same way you would think about any other form of income.
With that said, if you truly have your financial situation in order, including not carrying any debt and having a strong long-term investing strategy in place, you can consider using a portion of your bonus for charitable giving purposes or a little enjoyment for yourself. To help you get started on deciding where your bonus will help the most, here are a few ways you can use the extra cash.
[See: 7 of the Best Stocks to Buy for 2018.]
Pay off any debt. Even if you typically don’t carry any debt, you may have amassed some during the holiday shopping frenzy. Start by paying off credit cards with the highest interest rate first. You can also take advantage of the opportunity to put money toward any car loans or student loans, and if your bonus is significant, you may even want to consider using part of your bonus to pay down your mortgage debt.
Give your emergency fund extra padding. You should also take a look at your emergency fund and make sure it is either replenished or given some extra padding so you’re fully prepared when the unexpected, such as a medical bill, job loss or costly repair, inevitably occurs. A general rule of thumb is to have at least three months of your salary set aside.
Increase your investments. If your current financial situation is solid, consider investing your newfound cash. However, resist the temptation to invest in an ad hoc manner just because you’ve scored a windfall. Make sure you remember your long-term investing strategy, and instead of picking a few hot stocks, focus on lowering volatility and diversifying your portfolio. You can also use your bonus to max out your retirement contributions, either in your employer-sponsored 401(k) plan or in an individual retirement plan. You may want to consider contributing to more than one account in order to diversify your tax treatments, since 401(k)s and IRAs are tax-deferred, but Roth IRA contributions are made with after-tax dollars.
[See: 8 Things Not to Hide From Your Investment Professional.]
Give to your loved ones or a favorite cause. It’s the holiday season and, provided your financial house is in order, many individuals are looking for meaningful ways to give their money. If you’d like to support a family member, you could start a 529 college savings plan or contribute to a trust fund that has been created for your child or grandchild. You could also help a loved one with an extra payment on a student loan or rent. Alternatively, you could make a donation to your favorite nonprofit. Depending on the organization, there might be an added tax benefit. Some employers even match charitable contributions, so it’s worth checking with your HR department and obtaining any necessary paperwork.
Invest in your New Year’s resolutions. Think about what your goals will be for 2018 and consider whether there are ways to use your bonus in a way that will help you accomplish them. If you aim to make healthier choices, invest your bonus in a gym membership or wellness group. If you’re striving to slow down your lifestyle, book a vacation or meditation retreat.
[See: These 7 Funds Make You Feel Good About Investing.]
The fact of the matter is, you have worked hard all year to earn this well-deserved bonus. While you ideally will be able to treat yourself or others with a portion of the bonus, it is essential to view the money as you would any income and use it to advance your financial well-being. In the end, certainty and security are two of the most important assets.
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5 Smart Ways to Use Your Holiday Bonus originally appeared on usnews.com
