7 Smart Ways to Use Your Year-end Bonus

Main takeaways

• Eliminating credit card debt is one of the smartest ways to use a bonus, since it stops interest from draining your income.

• Rebuilding your emergency fund can help ensure you’re ready for surprise expenses.

• You can stretch your bonus further by beefing up retirement savings or setting aside cash for near-term goals.

• It’s fine to treat yourself, but keep the splurge small enough that it doesn’t derail your bigger financial plans.

The holiday season is around the corner, and a lot of workers are expecting something better than a “Jelly of the Month Club” membership in their stocking. Last year, for example, 22 percent of private-sector employers reported getting an end-of-year bonus, and 4 percent received a holiday bonus, according to the Bureau of Labor Statistics.

Though it can be tempting to buy an expensive gift for yourself or go on a sunny vacation, there are probably better ways you could be using that windfall. Here are some that you may want to consider.

1. Get rid of high-interest debt.

If you’re carrying debt with a high interest rate—especially credit card balances—paying it off should be one of your top priorities. Getting rid of those balances means there’s less interest eating away at your income every month, so you can put your money toward more productive uses.

Start with the credit card or loan with the highest APR and eliminate that one first. Then, move to the card with the next highest rate. Depending on the size of your bonus, you can go a long way toward erasing the “bad” debt in your life.

2. Bulk up your emergency fund.

Some of life’s biggest expenses—a roof repair, a new air conditioning unit, a trip to the emergency room—can creep up at the least expected time. But having a source of funds that you can readily tap into will take a lot of the stress away.

If you’ve neglected your emergency fund throughout the year, this can be a great time to build it back up. Aim to have at least three to six months’ of expenses stashed away, so you’re ready for any surprises that come down the pike.

3. Boost your retirement savings.

A bonus can be a great time to bolster your retirement account, especially if you’re behind your target. Only half of workers with a retirement savings plan expect to live comfortably when they retire, according to a recent Gallup survey—despite the soaring stock market over the past couple years.

You can put all or part of your post-tax bonus amount into an IRA, if you own one. Or, you can increase your workplace plan contributions in the coming year, using the extra cash to make up the difference in your paycheck.

4. Save for short-term goals.

If you have big plans on the horizon—a home renovation, new car purchase or a wedding—paying with cash instead of taking out a huge loan will dramatically improve your future financial health.

For expenses that you’ll incur in just a year or two, you’ll want to keep your funds somewhere that isn’t vulnerable to market volatility. High-yield savings accounts and CDs can be a good way to grow your balance without worrying about a sudden dip in the market.

5. Prepare for your child’s college costs.

The price tag of a university education is enough to make any parent shudder. But the more you set aside beforehand, the less scary those bills will be.

Consider allocating a portion of your bonus to a 529 account or other savings vehicle for college. Depending on where you live, you may also get a state income tax break for your contributions.

6. Invest in your future.

Investing your money in the market is great, although investing in yourself can sometimes reap even bigger dividends. Have you been thinking about getting a new degree or certification?

Or perhaps starting a small business? Your end-of-year bonus might provide some of the funding you need to build yourself a more lucrative future.

7. Treat yourself.

It’s okay to reward yourself for your hard work throughout the year. But it’s important to decide on an amount that won’t hinder your financial goals. Splurging a little can be satisfying, but you don’t want to end up feeling regret later on.

The upshot

Your bonus might feel like a fun little windfall, but using it intentionally can set you up for a far stronger financial year ahead. With a few smart moves, you can enjoy the reward while still making real progress toward your long-term goals.