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Before you spend your holiday or year-end bonus, hit pause. With a little strategic planning, you may be able to use your bonus money to build up your financial reserves, pay down debt, save for future splurges like vacation and still get yourself something nice.
Getting a financial windfall doesn't happen often. When it does, it's worth thinking through the best ways to use your money to improve your financial outlook and reward yourself for a good year's work. Here are seven good ways to spend your holiday bonus.
1. Treat Yourself
If you can swing it, consider using a portion of your bonus to do something nice for yourself. Treat yourself to concert tickets. Get matching sweaters for you and your dog. You may find other, smarter uses for the bulk of your money, but remember that at least part of your bonus is intended to be a reward.
A splurge is a splurge, so anything goes here. But if you want to use your bonus money to improve your life in the year to come, consider investing in your career and work-life balance.
How to treat yourself with your holiday bonus:
- Refresh your home office. Get better lighting, an ergonomic chair or faster internet.
- Take a class or register for a conference. Keep your career knowledge fresh, develop new areas of expertise and boost your motivation.
- Fund a new wellness practice. Buy running shoes, take music lessons or buy an annual pass to your neighborhood pilates studio or local amusement park. You'll feel better all year.
2. Build an Emergency Fund
Experts recommend keeping at least three to six months' worth of expenses in emergency savings. If your emergency fund doesn't quite hit that mark, consider dedicating at least some of your bonus money to building up your savings.
How to build an emergency fund with your holiday bonus:
- Open or fund a high-yield savings account. High-yield savings accounts pay higher interest rates than regular savings, but without the restrictions of certificates of deposit (CDs) or investment accounts. Because many high-yield savings accounts are online, they can be a great way to keep your emergency cash accessible but separate from regular checking.
- Set up automatic deposits. Setting up an automatic savings plan ensures that a portion of each paycheck goes into your emergency savings before you can spend it.
Learn more >> How Much Money Should You Have in Your Emergency Fund?
Find High-Yield Savings Accounts
3. Pay Down Credit Card Debt
Paying off high-interest holiday card debt or running credit card balances can save you money and raise your credit score. As of August 2024, the average credit card interest was 21.76%, according to the Federal Reserve. Because rates are so high, you may see a greater return on paying down card debt than you would earning interest on savings or investing. As a bonus, lowering your credit card balances will improve your credit utilization rate, which could improve your credit score.
How to pay down credit card debt with your holiday bonus:
- Pay down high-interest debt first. You'll save the most money by eliminating the highest interest charges.
- Pay off small card balances. Where you can, pay off small balances entirely to streamline your finances and reduce mental clutter.
- Keep going with a debt payoff plan. If you can't wipe out card debt entirely, keep your momentum going with a plan to pay down debt throughout the year.
Learn more >> Debt Snowball vs. Debt Avalanche Method
4. Save for Short-Term Goals
Your bonus money can kick-start short-term savings goals like going on vacation, buying a car or paying for a wedding. To build toward non-emergency savings goals, start a sinking fund—or funds. Sinking funds are dedicated savings accounts that let you save for big expenses over time. When you reach your savings goal, you can close your sinking fund or switch to a new goal.
How to save for short-term goals with your holiday bonus:
- Open an account specifically for short-term goals. A money market account typically earns higher interest than a regular savings account and may include a debit card you can use to make purchases. Otherwise, a high-yield savings account is a familiar savings format that comes with higher yields.
- Consider multiple savings accounts. As long as you meet minimum balance requirements to avoid fees (if any), there's no limit to the number of savings accounts you can have. Or, try a budgeting app to track multiple goals within a single account.
5. Contribute to Your Retirement
If you haven't already maxed out on your employer's retirement plan for the year, consider making a one-time contribution now. Contributing to a traditional 401(k) will lower your taxable income and save you a few dollars at tax time, in addition to providing the long-term benefits of saving for your retirement.
Already maxed out? You still may be eligible to contribute to a traditional or Roth IRA.
How to contribute to your retirement with your holiday bonus:
- Know your limits. For the 2024 tax year, you can contribute up to $23,000 ($30,500 if you're 50 or older) to a 401(k) plan and $7,000 ($8,000 for age 50 and older) to a traditional or Roth IRA.
- Diversify your tax benefits. You can do this by opening a Roth IRA, if you already contribute to a traditional 401(k) at work. Roth contributions aren't tax deductible, but your money will grow tax-free and you can make tax-free withdrawals in retirement.
- Map out contributions for the year to come. The IRS adjusts contribution limits for inflation every year. Now's the time to consider increasing the amount you contribute per paycheck or set up automatic contributions to your IRA.
Learn more >> What's the Difference Between an IRA and a 401(k)?
6. Start an Investment Account
Opening a brokerage account opens the door to investing in stocks, bonds, exchange-traded funds and more. Unlike your earnings in tax-advantaged retirement accounts, the dividends and capital gains you make in a taxable investment account are just that—taxable. But, the returns on investing are typically higher than interest on regular savings over the long term, so learning to invest is a great skill to master.
How to invest with your holiday bonus:
- Start small. Beginning investors with limited funds have many options, including online brokerages and investing apps. Look for a brokerage that suits your style: managing your own trades, working with a stockbroker or using a robo-advisor.
- Consider a robo-advisor. For new investors, robo-advisors can bridge the gap between going it alone and paying for the expertise of a financial advisor. Automated robo-advisors create portfolios based on your financial goals, risk tolerance and other factors, and rebalance your investments as needed.
7. Donate to Charity
Contribute to a cause that really matters to you. If you need ideas, Charity Navigator can help you find and fund charities that align with your personal mission. Qualified charity contributions are tax deductible if you itemize deductions on your federal tax return.
How to donate to charity with your holiday bonus:
- Find a charity you love. Although it's tempting to give money to whichever charity asks first, choosing a cause you connect with can make charitable giving more meaningful. Sticking to charities you know and have vetted can also help you avoid scams.
- Sign up for a fundraising event or volunteer. You can increase your impact by participating in an event like a charity 5K where you raise funds on social media or at work. Also ask about volunteer opportunities if you want to stay engaged.
The Bottom Line
While you're focused on spending and saving, you might consider doing a full financial check-up to kick off the new year. Take stock of your savings and investment balances. Total up your credit card bills. Have a look at your credit score and credit report to see whether you're on track or need to set a few goals for the new year. Your holiday bonus happens once a year, but financial wellness spreads cheer in every season.