Are you currently enjoying the fruits of a well-deserved bonus from your company? Congratulations! Your hard work has paid off.
We recommend being thoughtful about how you spend your hard-earned bonus, ensuring it is a part of your overall financial plan and aligns with your priorities to reach your full potential.
We will share five smart ways to use your money to prioritize what matters most to you (in no particular order; you choose what makes the most sense for you).
- 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 places to 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: Allow you to put money away for the future while deferring taxes on any profits. 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
Make the most of your bonus by indulging in a memorable experience or outing. Treat yourself and create lasting memories, whether it’s a weekend getaway, a lavish dinner at a fine restaurant, or any other activity that brings you joy.
4. Donate to a charity or cause close to your heart
Donating extra funds to a charity or cause can be rewarding and make a real difference. Doing ample research beforehand will help ensure your money goes to a trustworthy and authentic organization. Giving directly to those in need is another option. Maybe someone in your circle is struggling financially due to a recent hardship that you want to help out. 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 reflects your values—whether it’s something local or global—so you can use your money to support what matters most to you.
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.
Final word
A bonus from your job can have lasting effects if you are thoughtful about how you spend it. Having a plan that aligns with your goals and values upfront is the right step towards achieving the life you’ve imagined through financial wellness. If you follow any of our five tips, you could not only make your money work harder today but also down the road as you continue to progress on your financial journey.
Learn how a CFP® Professional at Facet can help you develop a proactive and ongoing investment strategy that helps to keep more of your money working hard for you.
