In the spirit of the season, 3 out of 4 companies will be handing out holiday bonuses this year, according to a survey of human resources and hiring managers by Accounting Principals. While some people may get just enough to take the family out to dinner, the average company bonus is reportedly $1,081.
[Read: 8 Financial Gift Ideas for Children.]
Financial planners say that extra money can be used in all sorts of useful ways, but only if workers treat the money like they would a paycheck. “People fall into the trap of thinking it’s found money and blowing it on things they normally wouldn’t buy for themselves,” says Travis Sollinger, director of financial planning at Fort Pitt Capital Group in Pittsburgh.
That doesn’t mean you can’t spend some money on yourself. Your spending should be tempered by saving a portion or donating some of the bonus to charity, says Andrew Crowell, vice chair of D.A. Davidson’s Individual Investor Group. “There’s a little bit of a science but a lot of art behind what’s optimal for each family and situation.”
Depending on your unique circumstances, one or more of the following six strategies may be the right way to make the most of your holiday bonus.
Pay down debt. You can use your bonus to add 18 percent to your bottom line, or whatever other interest rate you currently pay on consumer debt. “If you pay 18 percent on a credit card and you pay it off, [it’s like] you’re getting an instant 18 percent return on your money,” says Jordan Goodman, author of “Master Your Money Type.”
While using bonus money to pay off debt is a smart move, Goodman cautions against becoming what he calls a “debt desperado.” These are people who run up debt with the idea that a white knight — in this case, a holiday bonus — will appear to save them. The problem with spending in advance of getting the bonus is that if your company has a bad year, the white knight may never arrive.
Get a tax deduction. Getting a tax break is another way to make the most of a holiday bonus. Money deposited in a traditional IRA, 401(k) or health savings account can be deducted on your federal income tax return. Contributions placed into a 529 college plan aren’t eligible for a federal tax deduction, but some states allow for a deduction on state tax returns.
Another option is to donate money to a charitable organization. “If you’ve checked off all the other things, it’s another way to save money on taxes,” says Sara Rajo-Miller, an investment advisor at Miracle Mile Advisors in Los Angeles. Cash donations can be included in the itemized deductions on a federal tax return.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Increase the value of your house. “The poor use of a bonus is basically blowing it on something and you get nothing in return,” Sollinger says. Dinners and vacations may be nice, but they leave workers with nothing but a few memories in exchange for their hard-earned money.
Sollinger recommends spending a bonus on something tangible that will have value after the money is gone. One good way to do that is to invest in your home by making necessary updates or repairs. Not only does this spending improve your quality of life immediately, but it also adds to the long-term value of what may be your biggest asset.
Buy some peace of mind. Another way to use a holiday bonus is to ensure your personal affairs are in order. Crowell says too many people have unfinished wills or are missing a power of attorney, health care designee or other legal forms. “Get that done,” Crowell says.
Purchasing life insurance, long-term care insurance or building up an emergency fund are also ways to buy peace of mind with your holiday bonus. While not the flashiest way to spend money, these purchases may be some of the most important ones you can make.
Keep it safe by spreading it around. Just as you should diversify your investments, you should diversify how you spend a bonus, particularly a large one. The recent upswing in the stock market might tempt some people to invest all their money there, but Crowell doesn’t recommend it. “People can be lured by a sharp up-rise [in stock prices], think the train is leaving the station and throw [their bonus] all in there,” he says. If the stock market should drop after the new year, a worker’s bonus could disappear with it.
Beyond simply keeping the money safe, using your bonus for multiple purposes can provide more personal satisfaction. It means you’re working toward several goals at the same time and may prevent you from spending the money all at once. “You do work for a whole year for that bonus and then to have it be gone in one day,” Rajo-Miller says, would be unfortunate.
[Read: 6 End-of-Year Retirement Planning Tips That Will Save You Money.]
Treat yourself for a job well done. You don’t have to be practical with the entire bonus. “Splurge half,” Goodman says. “It is good to enjoy life.” Other financial planners, like Crowell, suggest spending a third, but both agree spending a little of the bonus is just as important as saving some of it.
The key is to spend it wisely. “Invest it, conserve it, grow it,” Goodman says. “Don’t just blow it on consumption.” Being smart with your holiday bonus means the money won’t be here today and gone tomorrow. Instead, it will be here today and reaping benefits for you tomorrow.
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6 Ways to Make the Most of Your Holiday Bonus originally appeared on usnews.com
