4 smart ways to spend your end-of-year bonus that you won't regret later
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- Getting a bonus is a good time to kick start your goals, according to a financial planner.
- It's not about spending more - it's about saving more for retirement, emergencies, and paying down debt. Then, save some to enjoy yourself.
- Divide up your bonus income across several of your goals, including maxing out your retirement account, paying off your biggest debt, or making sure you have a full three to six months of expenses.
- Read more personal finance coverage.
Getting an end-of-year bonus at work is exciting, but figuring out what to do with it can be intimidating.
Financial planner Sophia Bera of Gen Y Planning says that spending more isn't the answer. "I like using bonus income to turbocharge your financial goals," she says. For anyone getting a bonus this year, she suggests "paying down debt, building up savings, and getting on track for retirement" to use it well.
"If you're already doing those things, we get to just use the bonus to help you get there even faster," Bera says.
Here are four ways to spend your bonus that you won't regret later:
1. Use your bonus to save more for retirement
Getting a bonus could help you reach your goal of maxing out your retirement account even quicker than you usually would. Bera recommends choosing a percentage of your bonus to go into your workplace's 401(k), if you have one.
"You can elect a certain percentage or a certain amount of your bonus to go toward your 401(k)," Bera says. "That can be a really nice way to put more money than you were planning on into retirement savings this year, and have it all at one time, instead taking it out evenly from your paycheck."
If you don't have a 401(k) at work, you can max out an IRA or Roth IRA instead.
Keeping a portion of your bonus growing is a great way to save for the future, and keep growing your net worth and retirement funds.
2. Pay off debt
"I think bonus income is a great time to just slay your debt," Bera says.
"Use a bonus to pay off a loan that's going to free up cash flow for later on," Bera says. Paying off debt will free up that money that was once your payment, allowing you to save more. She suggests re-routing that cash you've freed up into something that builds wealth over time. For instance, the $400 that used to go to your student loan payment every month could now be $400 that automatically goes into a savings account or investment account.
3. Top off your emergency fund
If you don't have an emergency fund, a bonus might be a good time to start a dedicated savings account for this purpose, or top off the one you already have. Generally, an emergency fund consists of three to six months worth of expenses in a dedicated savings account.
"You might only have a couple thousand dollars saved for emergencies, and a bonus is a great way to get closer to that three months of emergency savings," Bera says.
Having this buffer is a good way to keep from needing to borrow money or take on debt to stay afloat in an emergency.
4. Save some to treat yourself
Saving and investing for your future is important. But Bera says it's also important to save some cash for yourself. "If you're using 90% or 95% of your bonus for your financial priorities, it's okay to throw $1,000 in that travel savings account or buy that thing that you really want," she says.
Bera suggests anyone who wants to save some of their bonus for travel make a separate travel fund. "Bonus income can be a great way to set up a savings account earmarked for travel," she says. You can keep a savings account for surprise travel expenses, like a last-minute trip to visit family, or for unexpected vacation expenses. Open a new savings account to keep it separate from your other savings. "Then, you don't feel guilty when you spend it," Bera says.