If you’re in line to get a holiday bonus this year, it can be tempting to think about everything you can buy or start planning an extravagant vacation.
But before that extra direct deposit hits your checking account, take some time to consider how you want to use it. No matter the size of your hard-earned bonus, you should think about how it can best serve you and your goals in the long term.
Here are six ways to use a holiday bonus to extend its benefits into the new year and beyond.
1. Pay off debt
If you have high-interest debt looming over you, bonus money can be a way to making a dent in the balance — and possibly pay off the debt entirely.
Credit card debt is likely to cost you the most in interest, so that’s a great place to start.
“If you’ve run up those credit cards and you’re paying astronomical interest rates, you may want to get those knocked off as a first step,” says Dan Keady, chief financial planning strategist at TIAA.
Stephen Williams, senior vice president and head of financial planning at BMO Private Bank, adds, “Pay that down or pay it off completely with the bonus, because if you’re paying credit card interest of 15 percent, it doesn’t really make any sense to invest money in the stock market and hope you outpace the 15 percent. That’s a tough ask.”
2. Invest the money
After your high-interest debt is wiped clean, look into investing the remaining money. A good starting point is your retirement accounts.
“Your workplace plan may allow you to designate some of that bonus or all of the bonus to go into your 401(k),” Keady says. “That’s a great way to save taxes and build your savings.”
If you’re unable to direct the bonus into your 401(k) before it’s taxed or you’ve maxed out your contributions for the year, Williams recommends building the money into your budget throughout the year, and then designating more of each paycheck toward contributions.
“You could say, ‘Well now that I have this money that I can use for expenses or to pay off some debt, I’m going to up my percentage contribution to my 401(k) in 2019,’” he says.
Another option is to contribute to a secondary retirement account.
“You could look at something like a Roth IRA, because this is after-tax money, so you’re not looking for any upfront tax benefit,” Williams says. “The benefit of the Roth is on the backend where that money comes out tax-free.”
3. Check in on your emergency fund
If you took a hit from some unexpected expenses this year or you haven’t yet built an emergency fund, use your bonus money to ensure you’re covered.
“That can be an ideal thing to do with that cash, because we all get unexpected expenses that can make our cash reserves go way down compared to where they should be,” Keady says.
Experts recommend you should work to save six months’ worth of expenses in an accessible savings account in case of unexpected emergencies like a job loss, natural disaster or even car trouble. This can give you peace of mind and a backup plan for anything unexpected that may come your way in the new year.
4. Contribute to a 529 plan
Another way to be proactive with your bonus money is to open or contribute to a 529 plan.
Williams says this is an especially smart solution for people with younger kids who can let their 529 plans grow without worrying too much about current market volatility.
“If you’ve got a long-term time horizon, some younger kids and you want to put some money into that 529 plan, have it grow 10, 12 years tax-deferred and then take it out for qualified college expenses, that certainly would be a good strategy at this time,” he says.
529 plans are also great vehicles for your bonus money because they often fall to the bottom of priority lists, behind retirement accounts and other investments.
“Right now, you’ve got that money,” Keady says. “It would be a great way to fund that 529 plan, with those extra dollars.”
5. Don’t get reliant
Planning your annual budget around a bonus that may or may not come can result in dangerous lifestyle creep.
Regular bonuses are a great year-end treat, but Keady warns that becoming too reliant on your annual bonus can lead to trouble down the line.
“One of the things that can be hard for people who have a repeat bonus that’s relatively similar for several years is they start to look at that as an extra paycheck each year, and it’s really not,” he says. “So I don’t like to budget it into day-to-day expenses.”
6. Move quickly
The longer you let your money sit in your checking account, the more likely you are to spend it without thought.
“The most important thing is to get people to take action,” Keady says.
It’s OK to have fun with a bit of your extra money; you earned it, after all.
“I think it’s important for somebody who’s earned that bonus to be able to purchase something of a discretionary nature that’s a feel-good reward for achieving that bonus,” Williams says.
Just don’t leave the reserve where it’s easily accessible and tempting. While spending the money on gifts and treats for yourself may feel good in the moment, crossing off some long-term goals that you’ve been working toward will feel even better.
“You should have already hopefully picked out one of those big ones, whether it’s replenishing your reserve, putting it in a workplace plan, an IRA, health savings or high-interest debt,” Keady says. “Think about that before you actually get the check and then move quickly, because otherwise it could dissipate.”