So you got a bonus for all your hard work.

Congratulations! It’s great to be rewarded after you put in considerable effort. But now comes the question of what you should do with your new bonus.

Start thinking about what to do with it.

The best time to think about what to do with your bonus is before you have it. You are cool, calm, and rational at that time since the money hasn’t even arrived yet.

But if you didn’t give any thought to what you’d do with your bonus then now is as good a time as any. To give you the freedom of time to think, secure your funds – ideally away from yourself or anyone else.

Secure the funds and don’t do anything … yet.

When getting bonuses, people naturally want to immediately start using the funds. But that’s a mistake.

Park your funds somewhere safe like a personal checking account, money market fund or savings account (not under your bed) where you can speak to any tax advisors or professionals for help (if needed).

You want to be clear if you need to set aside funds to pay taxes on the bonus if they haven’t already been withheld.

Pay off debt

 

The average American household has credit card debt exceeding $8,000
and it continues to rise each year! Allowing your credit card balances to roll over each month increases the compound interest you pay and wrecks your financial future.

So paying off high-interest debt (like credit card debt) is a great way to spend your bonus money. It helps get you out of the red and into black. And if you’ve been carrying a balance on credit card debt for some years then it’s a way to take a big chunk and clean up old debt.

Need ideas on how to use your bonus for debt?

Use all of it: funnel all your bonus to your debt if your bonus will completely clear all your high-interest debt. Then you can use that freed up monthly debt payment for saving. If your bonus will be a drop in the sea of your debt, then don’t dump all your bonus into it especially if you have other needs … like saving for an emergency fund.

Use most of it: if you have one or two loans that can be completely cleared. If you have high loans that will completely swallow up your bonuses then consider setting aside a percentage of the bonus towards debt and the rest to other financial goals.

Fund your emergency fund

Did you know 40% of people don’t have enough money to cover a $400 emergency? Make the commitment to not be a statistic.

If you’ve been living life on the edge with no emergency fund (or a super anemic one) then getting your bonus is a great way to finally have some ‘insurance’ against the disasters bound to happen.

Need some guidelines on how to allocate your bonus?

Use all of it: If you have no emergency fund or have a large activity coming up that will require a lot of funds, for example, having a baby, major surgery, or unemployment, then save all of your bonus or it because cash is king.

Use some of it: If you have no emergency fund or your emergency fund does not cover at least enough saved to cover a $1000 expense and your medical insurance deductible, then you might want to allocate a hearty chunk of your bonus

Fund your Roth IRA

No matter your age, there’s always room to invest in your future.

As you know my favorite retirement vehicle is the Roth IRA. Mostly because contributions can be withdrawn without tax or penalty if you get hit by hard times and need that money back.

Can’t figure how much of your bonus to use for retirement investing?

use all of it: If you already contribute to your 401k, have your debt well under control and you qualify or if your company does not have a retirement plan.
If you haven’t invested anything in your company 401k or an IRA (if your company doesn’t have one) then it’s time to use that bonus to kick start that retirement now.

use some of it: If it’s more than the annual contribution limit or if it’ll max out your annual contribution limit.

Fund your child’s education

Another great way to use your bonus money is to fund your children’s 529 or college savings account. College is expensive and getting more expensive every day. And since the college degree has become the new high school diploma, then it’s likely your child will need to go to college. Since it has steadily become the minimum requirement for professional positions.

If you can help your kiddo by providing funds for their education (reducing their likelihood to add to the over 1.4 trillion student loan debt) then do it!

So how much of your bonus should you use to fund your child’s education?

Use all of it: if your high-interest debt is paid off and your child is within a year or 2 of college and you’d like to help them pay for it. You can also use all of it if your child is near graduation from college and need assistance in order to complete the final year.
Use some of it: If you plan to help your child to pay for college and haven’t started saving at all. But use a portion as well to make sure you are secure financially as well.

Complete delayed home maintenance

Home maintenance is the crappy side of owning a home. But if you don’t do it regularly, that cheap maintenance job can turn into a nightmare if delayed. If you have been neglecting to complete maintenance in your home due to lack of funds, then now’s a great time to get those taken care of.

How much of your bonus should you use?

Use all of it: If there is some delayed maintenance on your home that threatens your ability to live there or threatens to extensively damage your asset. This could mean a new roof, foundation work threatening the structure of your home, etc.

Use some of it: if there is expensive maintenance that requires prompt attention but still has some time to save up, for example, A/C, furnace work, etc.

Give back

Regardless of how much you received on your bonus, take a percentage, and share the wealth. All our blessings are meant to be used to help each other, and sharing a few of your blessings will help you good as well.

Use all of it: If you have no debt, no financial requirements to prepare or plan for, and don’t need the bonus. You can also give all the bonus if you are a high-income earner and need to reduce your taxable income or if you are simply feeling incredibly generous. Give to your heart’s content!

Use some of it: Take any percentage of your bonus as long as you can give without fear while being a cheerful giver.

Plan a trip

Last and probably the least thing to use your bonus for is a vacation.

Don’t get me wrong I love vacations, and I think it’s a great way to bond as a family and recharge your batteries. But vacations should be planned. They should be budgeted for. Not be a spur of the moment activity where the cost of the vacation is ‘whatever the bonus happened to be.’

Use all of it: All the other options have to be taken care of by your monthly income/cashflow. You are in prime financial nirvana and would have had the money for a vacation even without the bonus … get my drift?

Use some of it: if you are working on executing the plan for all the other areas of your finances and the bonus was a planned piece of your reward strategy.

All of the above

Depending on the size of your bonus it might be worthwhile to split your bonus up into varying categories – a little forgiving, a little for debt, and a little for savings.

Either way, these are likely to be better than spending your bonus on an above ground pool or elf spotting school.

So tell me what are you doing with your bonus or tax return?

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