What should I do with my bonus?

Thinking through options for your bonus

As you complete another year at work, you may be looking forward to a well-earned bonus. You’ve worked hard and you deserve that extra cash. It can sometimes be tempting to splurge on gifts and other big purchases as soon as your bonus hits your bank account. But there may be better options to make your bonus work for you.

That’s not to say you can’t spend part of your bonus on special purchases to treat yourself and your loved ones. However, if you put a little thought into how to use your bonus, this extra money can help you work toward financial goals. Here are some ways to put your year-end bonus to work.

Pay down debt

A bonus can be a beneficial opportunity to tackle debt. It can be tough to get out from under credit card debt, student loans, car loans and other debt. Maybe your bonus is big enough to wipe out a quarter or half of your credit card debt – whatever the amount, it will help you in the long term if you can start chipping away at loans, especially high-interest rate ones.

Contribute to retirement accounts

Consider using some or all of your bonus to contribute to your 401(k), if you have access to one. This is an effective way to save on taxes and grow your retirement savings at the same time. If your job offers some form of 401(k) matching, make sure to take advantage of this.

If you don’t have a 401(k) or if you already contributed the maximum amount to your 401(k), you can also use your bonus to contribute to another type of retirement account, like an IRA, so long as you haven’t maxed out your contributions for the year.

Invest in the market

If you already have an investment portfolio, a bonus can help you grow it. If you’re new to investing, there are a variety of ways to start, from self-directed online accounts to working with an advisor. Either way, you can have access to a variety of investment products that consider your objectives and risk tolerance.

Save for your child’s education with a 529 plan

If you will be paying college tuition for a child in the future, a 529 savings plan is a great way to start investing for education. You can start this tax-advantaged account when your child is born and contribute to it up to and through the time that they are attending college. Grandparents or other loved ones can also put money into the fund.

Start or bulk up your emergency fund

If you already have an emergency fund, you can grow it with your bonus. If you don’t have an emergency fund, it’s never too late to start one. Most financial advisors recommend that you should save three to six months’ worth of expenses and keep the money in an accessible savings account. If you lose your job, your car breaks, you have a large medical bill or another unexpected expense comes up, you’ll be able to focus on the problem at hand without stressing too much about finances.

Treat yourself

Of course, it’s a good idea to be practical with your bonus. However, once you have checked off a few big goals, it’s reasonable to spend part of the extra money on something fun. Maybe that means booking a weekend getaway or taking your family out for a nice dinner. Maybe it’s splurging on a fun item of clothing. It’s important to find a balance between spending money on the things you care about and saving and investing for your future.

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