Do you expect an end-of-year bonus? If so, you’re probably dreaming of all the ways you could spend that windfall.
According to payroll Gusto, the average bonus in December 2023 was $2,447. That’s a significant chunk of change, one that could put you in a better financial position by 2025 with the right planning.
If you expect a bonus to hit your account soon, it can be tempting to spend money. And that’s fine. After all, you deserve a reward after working hard all year.
However, before you make an impulsive purchase, consider a few ways you can use this money to improve your financial situation.
In today’s high interest rate environment, it is expensive to take on debt. And the higher the interest you pay, the faster the debt balance can grow.
Therefore, consider using your end-of-year bonus to pay off some of your debts. This will not only clear your balance faster, but also save you money in interest over time.
For example, say you have $3,000 in credit card debt with an annual interest rate of 21%. If you took 12 months to pay off that debt, you would pay $279 per month and spend about $352 in interest (assuming you don’t make any new purchases with the card).
Now suppose you receive a $2,000 bonus and use it to pay down your credit card balance up to $1,000. In this case, you only have to pay $93 per month to clear your balance within a year. And you only pay €117 in interest – a saving of €235.
Read more: What is more important: saving money or paying off debt?
If you’re not sure what to do with your bonus money, you shouldn’t feel pressured to use it right away. You can put it aside in a bank account while you decide. However, if your money stays in the bank, you should at least earn interest and let it grow without you having to do anything.
Following the recent interest rate cuts by the Federal Reserve, interest rates on deposit accounts have been declining. Still, there are plenty of high-yield savings accounts, money market accounts, and certificates of deposit (CDs) that pay out more than 4% APY (or even more). Take the time to compare today’s rates and account options and put your bonus in an account so it can grow.
Check out our picks for today’s best account options:
It’s important to have a financial safety net in the event of a financial emergency, such as a car repair or job loss. An emergency fund can help you keep your budget intact and avoid taking on new debt to cover unexpected expenses.
It’s normally recommended that you keep enough money in your emergency fund to cover three to six months’ worth of living expenses, although you may need more in certain situations. If you do not yet have an adequate emergency fund, an end-of-year bonus can help you get started.
Read more: How much money should I have in an emergency savings account?
One of the best things you can do for Future You is invest for your golden years. In particular, retirement accounts like 401(k)s and IRAs are a good option because you can contribute pre-tax dollars, which can help you lower your April tax bill (or get a larger refund) and defer taxes. until you withdraw money.
For the 2024 tax year, you can contribute up to $23,000 into a 401(k), and an additional $7,000 if you are 50 or older. If you have not prioritized saving for retirement in the past, or if you want to take full advantage of an employer match, you can ask your payroll department to transfer all or part of your bonus to your account.
Read more: 401(k) vs. IRA: The Differences and How to Choose Which One Is Best for You
As we said, it doesn’t hurt to spend a little money every now and then, as long as you meet your financial obligations.
If you don’t want to feel like you’re selling yourself short, set aside half of your bonus for a “responsible” purpose and use the other half as you see fit. This can give you the momentum you need to stay on track when it comes to your financial goals, while still allowing you to enjoy the fruits of your labor.
Read more: How much of your salary should you save?
