- A bonus from your job can have lasting effects if you are strategic about how you spend it
- Add to your emergency fund with a portion of your bonus money
- Invest in your future or your child’s future with the extra cash from your bonus
- Spend mindfully. Being mindful of how you’re spending ensures that you will reap the maximum benefit from your bonus
- Donating to a charity. Donating a portion of extra funds to a charity or cause can be rewarding and can make a real difference
- Use some of your bonus to pay off some debt
Are you currently enjoying the fruits of a well-deserved bonus from your company? Congratulations! Your hard work has paid off. Of course, it’s easy to spend the money on something frivolous or ordinary; however, if you take a moment to think it through, there are smart ways you can make your bonus money work for you long-term.
In this blog post, we will explore five such strategies:
- Adding to your emergency fund
- Investing in your future (or your child’s)
- Spending mindfully
- Donating to a charity
- Repaying debt
How to use your bonus: 5 effective strategies
We know this is easier said than done—but remember, every small step counts. And when motivated by your big reward at the end of it all (including financial freedom), anything is achievable.
1. Add to your emergency fund
Having access to liquid money is essential to tackling any unexpected expenses life throws at you. One smart way to use your bonus money is by adding it to your existing emergency fund. This ‘rainy day’ cushion can be the difference between financial stability and chaos when faced with a huge bill or job loss. Aim for having three to six months’ worth of living expenses saved in your emergency fund (this number can vary depending on your circumstances).
2. Invest in your future (or your child’s)
This one is a broad topic because there are a ton of options available. To help narrow things down, here is a list of some places you can invest your bonus for your or your child’s future.
- Taxable investment accounts: Allows you to invest in stocks, bonds, mutual funds, and other instruments like ETFs. Earnings from investments in these accounts are subject to taxes such as capital gains taxes on any profits that exceed the cost basis amount. This type of account offers several advantages, such as greater flexibility in choosing investment options, no restrictions on how often you can withdraw money, and typically lower costs associated with brokerage fees than retirement accounts.
- Tax-deferred investment accounts: Allows you to put money away for the future while deferring taxes on any of the profits gained. The idea behind this is that by holding off paying taxes, you can use your money to earn larger returns since you won’t be paying out a portion of it each year in taxes. Examples of such accounts are retirement plans like 401(k)s or individual retirement accounts (IRAs). People also commonly use health savings accounts (HSAs) as an additional form of tax-deferred investing.
- Education savings plans: A 529 Plan is a type of savings and investment account you can use for educational expenses. It offers several tax advantages, including tax-free earnings on the money invested in the plan when used to pay tuition, books, supplies, and other qualified expenses. Contributions are limited to certain amounts annually and are not tax-deductible. However, any money left in the account at the time of distribution generally remains tax-free. While most commonly used for college education, 529 Plans can also sometimes be used for K-12 tuition costs and may sometimes be used for other purposes like student loan repayment.
3. Spend mindfully
One great way to enjoy your bonus while still having something to show for it is to plan a special event or outing. Whether you take a weekend trip with family and friends or treat yourself to dinner at a fancy restaurant, being mindful of how you’re spending ensures that you will reap the maximum benefit from your bonus. Investing in enriching experiences like this helps ensure that your money isn’t wasted and keeps it top-of-mind, unlike impulse purchases that don’t provide any lasting value.
4. Donate to a charity or cause close to your heart
Donating a portion of extra funds to a charity or cause can be rewarding and can make a real difference. Doing ample research beforehand will help ensure your money is donated to a trustworthy and authentic organization. Giving directly to those in need is another option. Individuals struggling financially due to pandemic-related job loss or those in ill health and needing medical assistance for which the public system does not cover are good examples. Even small donations can go a long way in supporting people who need help. At the end of the day, it’s all about finding a cause that resonates with you—whether it’s something local or global—so you can personally feel connected with giving your support.
5. Repay some debt
Using your bonus to pay off some of your debt can really help you in the long run. Repaying debt is smart because it helps build strong financial habits, reduces stress, and frees up cash for other goals. Plus, when you pay down debt faster, you save yourself from paying more interest over time. Making decisions about how to use your bonus can put you ahead financially and bring peace of mind.
A bonus from your job can have lasting effects if you are strategic about how you spend it. Spending your hard-earned cash on something fun and immediate may be tempting, but we encourage you to consider other options that will benefit you in the long run. If you follow our five tips, you’ll not only make your money work harder for you, but also reap the rewards of financial freedom down the line. With careful planning and execution, anything is possible—including becoming debt-free and enjoying a comfortable retirement.
Learn how a CFP® Professional at Facet can help you develop a proactive and ongoing investment strategy that keeps more of your money working hard for you.