Four smart ways to spend your annual bonus
According to the latest data from the career firm Challenger, Gray & Christmas, roughly 66 percent of employers awarded a year-end bonus in 2023. With bonus payouts on the decline in recent years – as much as 36 percent at some companies – it’s more important than ever to strategize how you’ll spend any extra cash.
If you’re fortunate enough to earn a merit bonus this year, you may be considering a few options from paying down debt to treating yourself. Here are some avenues to consider before your annual bonus hits your bank account.
Adress immediate financial needs
One of the smartest things you can do with your bonus is address any immediate financial needs that are holding you back from achieving your goals. Paying off high-interest debt is one of the quickest ways to improve your overall financial situation. When you focus on eliminating high-interest credit card debt and loan payments, you can put more money toward an emergency fund or retirement savings.
Here are two ways to pay down debt quickly with your merit bonus:
The snowball method
With this method, you’ll start with your smallest debt first, paying as much as you can toward it while paying the minimum payment on others. Once you pay that initial debt off completely, take the amount you were paying and add this to the minimum payment of your next smallest debt. The minimum payment you’re making keeps growing like a snowball tumbling down a hill.
The avalanche method
With the avalanche method, the debt with the highest interest rate is addressed first, while still paying the minimum on other accounts. Once you pay that debt in full, move on to the next highest interest debt, and so on.
This method is the most cost-effective and will save you more money in the long run, but can take longer to see results. If faster successes on paper motivate you, the snowball method may suit you better.
Additionally, if you don’t have an emergency fund, it is a good idea to save part of your bonus to start one. Putting aside $500 to $1,000 in an emergency savings account can help you avoid unexpected credit card debt. Even if you have a lot of credit card debt, it’s smart to save money for emergencies. Just make sure you can keep paying the minimum on your other debts.
Paying down debt and seeding an emergency savings are the two most important things you can do with an annual bonus. If both are taken care of, and there is still money left to allocate, consider depositing the money into your retirement account. Contributing some or all of your bonus to a tax-deferred retirement account, like a 401(k) or traditional IRA, could potentially lower your taxable income, helping you out further during tax season!
Speaking of tax season, do you have money saved for a potential tax bill, come April? Saving a portion of your bonus to quickly pay an unexpected bill can help you save money on interest charged for paying your tax bill in installments.
Save money for future financial goals
If you’re a New Year’s resolution person, you may already have an idea of some things you’re hoping to accomplish in the coming year that will require extra cash. Are you planning to buy a more reliable car this year? It could benefit you to set aside some of your bonus for a downpayment, making your monthly loan payment more affordable.
Perhaps you’re looking to buy a house in the near future. Depositing your annual bonus into a high-yield savings account is a safe way to keep your money readily available, should your dream house hit the market, while earning dividends.
Additionally, think about your long-term financial goals and what it will take to reach them. If you plan to go back to school, or send your children to college, it could be helpful to save a portion of your bonus for such an expense. A financial professional like an Empeople Financial Guidance Expert can help you ensure you’re saving your hard-earned bonus in the best account for your specific goals.
Invest in your home
If you’ve been dreaming of making renovations or upgrades to your home, using your annual bonus to fund the project could be a financially responsible choice! Not only do upgrades to your home make an immediate positive impact on your day-to-day life, they also could increase the value of your home.
While home projects like kitchen and bathroom updates can drastically boost your home’s value, small projects like replacing the flooring can also make a significant impact. Before your merit bonus hits your bank account, carefully consider the home projects on your list and prioritize which you’d like to complete first.
Create a budget, roughly estimating the price of each project so that you can decide which projects to tackle once your funds hit your account. If your project costs exceed your bonus payout, consider applying for a home equity line of credit (HELOC). A HELOC is a savvy option for those looking to avoid high-interest credit card debt. Home equity lines of credit allow you to borrow against the equity of your home at a low interest rate, paying back the loan over a longer period – usually ten years.
Treat yourself to a celebratory purchase
While it’s important to work toward financial goals, it’s equally valuable to celebrate all of the hard work you’ve accomplished to receive a work bonus. After all, financial self-care includes rewarding yourself to motivate continued good money habits!
Allocating a portion of your bonus toward spending money or a celebratory purchase can help ensure you stay on track with your savings and debt goals. Knowing you get to celebrate your accomplishments with a set amount will help curb impulse buying past your allocated fun budget.
If you’re wondering how much of your bonus you should allocate toward treating yourself, or you’re looking for guidance on how to best spend your bonus money, an Empeople Financial Guidance Expert can help! Our one-on-one support is free to active Empeople members. We’ll help you to navigate complex financial decisions and work with you to align your financial goals, put the steps in place to reach them, and help keep you accountable along the way.
Remember, everyone’s financial journey is different, but finding the balance between celebrating your wins while staying focused on your goals is a universal experience you’re not facing alone.
