Nothing may be quite as nice as coming into some extra money during the holiday season. For many workers, that extra money may be coming in the form of a year-end bonus.
Nearly 80 percent of employers handed out bonuses at the end of 2014, according to a holiday bonus survey by consulting firm Challenger, Gray & Christmas. While about half of the companies gave their workers small gifts or checks worth less than $100, other workers walked away with significantly more.
Regardless of the amount of money doled out by your employer, you should make smart use of that extra cash. “Be conscientious of how you spend it,” says Joe Duran, author of “The Money Code” and CEO of United Capital in Newport Beach, California. “This is not lottery money. It’s earned money even if it comes all at once.”
3 Times You Should Save Your Bonus
For some people, saving a holiday bonus is a no-brainer. “In my experience, I do oftentimes have customers who are getting bonus checks and want to use it for a Roth IRA or a college fund,” says Paul Granucci, a financial solutions advisor with Merrill Edge in San Francisco.
Other people might not be so quick to put their cash aside for future expenses, but here are three times when it is better to save than splurge.
1.You don’t have an emergency fund. “Everyone should have some type of cash reserve,” Granucci says. “If someone doesn’t have that in place, then that would be the priority.” He suggests dual-income households keep an emergency fund that can pay for three to six months of expenses while one-income households should set aside enough to live on for six to nine months.
2.You haven’t maxed out your retirement funds. A year-end bonus can be a good way to max out contributions to traditional 401(k) and IRA accounts. The result is not only a healthy boost to retirement savings but also a tax deduction. “If you have not saved all year,” Duran says, “a bonus is the easiest way to be a saver.”
3.You’re in debt. Although putting a bonus check toward debt is technically spending, the net result can be savings since doing so reduces future interest payments. Granucci recommends that anyone with a large amount of unsecured debt consider using a bonus to pay off at least a portion of what’s owed. Eliminating debt, particularly high-interest debt from credit cards, can lead to significant savings in the long run and free up money for other purposes.
When You Can Splurge
Not everyone needs to be a miser with their holiday bonus, says one finance expert. Shanna Tingom, co-owner of Heritage Financial Strategies in Gilbert, Arizona, says people should feel free to splurge once they have their bills covered and money set aside for retirement. “If it is truly gravy for you, by all means, go for it,” she says.
However, be picky about how you spend that money. Buying dinner and drinks for your friends or a pair of shoes you’ll only wear once in a blue moon may be fun, but it also may not be the best use of your extra cash. “Don’t for go for instant gratification,” Duran says. “Buy an experience or something that is going to last.”
Why Not Do Both?
The decision of what to do with a bonus check doesn’t have to be a choice between saving and spending — there is no reason workers can’t do both.
“I recommend splitting [the bonus] into thirds,” Tingom says. “Save a third, spend a third and give a third away to charity or a family member.” She adds the only exception to that advice is if a major expense is looming in the future, such as a down payment for a house or a new car. In that case, the money might be best saved.
Duran also advocates splitting money between saving and spending. “If you don’t spoil yourself a little, you might end up splurging,” he says. By making a small, deliberate purchase, you may be less likely to blow through the rest on frivolous items.
However, before spoiling yourself, Duran advises thinking about how it could affect your ability to meet future goals. “A good question to ask is, ‘What’s the next big thing I want to buy? And is spoiling myself as important as getting that next big thing?'”
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Should You Save or Splurge That Bonus Check? originally appeared on usnews.com
