It’s that time of year again. Year-end bonuses have been or about to be distributed. Before that money lands in your account, it’s important to make sure you’re making the most of it.
You may be tempted to use your windfall towards a luxury vacation or a new pair of designer shoes. Sure, there’s some room for short-sighted fun, but you don’t want to squander all that hard-earned money without first figuring out how to make it work for you in the long term.
Here is how you can max your end-of-the-year bonus to set you towards a path of financial success in the years ahead.
Pay Down Your Debts
If you’ve maxed out those credit cards over the holidays, and you’re saddled with high-interest debt, pay that down—or pay it off completely—with your year-end bonus.
Yes, we get it. Paying down your debts may not be the most thrilling way to spend your bonus, but it can set you on the path to a more prosperous and less stressful new year.
Carrying a balance on your credit card will only end up becoming more expensive over time paying interest. Also, a high credit card balance can hurt your credit score, which can make it difficult to borrow money when you don’t have a windfall to rely on.
Think of it this way: the less debt you have, the more of your income that can be freed up and applied to other areas that are more splurge-worthy. Check out our debt management module, If you need advice on how to craft a plan to tackle your debt once and for all.
Build Your Emergency Fund
If there’s anything the past few years have taught us, it’s that we should prepare for the unexpected. You never know when an economic downturn will come knocking at the door, which is why it’s important to have emergency funds for a period of unemployment or unexpected expenses.
According to a recent survey by the National Endowment for Financial Education, 37% of Americans aren’t confident they’ve stashed away enough cash for emergencies. Ideally, your emergency fund should contain enough money to cover six months’ worth of essential expenses.
If you don’t have any money in a savings account right now, you should use your bonus to build your emergency fund. Even if you already have some savings, it’s not adequate if it doesn’t cover a month or two of expenses.
An even smarter move is to put that emergency bonus cash in a high-yield savings account or a high-yield CD and let the interest build your wealth for you. Doing this will give you peace of mind for those years you don’t get a bonus, have surprise bills, or worst, lose your job.
Max Out Your 401k and Other Retirement Savings Accounts
After paying down your debt, and shoring up your emergency funds, the next best step is to use that bonus to max out your 401k. At the very least, make sure you’re contributing enough of your bonus to take advantage of any “match” your company might make. Not only is it a great way to build your retirement savings, but it’s a great way to cut down on your income tax bill.
What if your company doesn’t offer a 401k or you’ve already maxed out your contributions? There are plenty of other retirement savings accounts, like IRAs, to direct your bonus towards. IRAs offer similar tax benefits as 401ks and plenty of investment options. Consider it as a gift to your future self.
Have (A Little) Fun
Finally, give yourself room to splurge (a little). We know. Saving is always going to be less enticing than spending. So, if you find yourself struggling with your end-of-the-year bonus priorities, try following the Rule of Three: use 1/3 to pay down debt, save 1/3 in your retirement accounts and use the final 1/3 on a treat. After all, it’s your hard-earned money. You might as well have a little fun.
Need More Advice?
It can be tempting to spend all of your bonus on a fancy vacation or a shopping spree after a year of hard work. However, it’s better to use your money this year to get a head start on your financial goals next year.
From high-yield CDs to IRAs, TFNB provides many avenues if you’re looking for opportunities to make your bonus work for you. If you have more questions, our team is just a phone call (or a few blocks) away!