3 Smart Ways to Spend Your Annual Bonus

the best way to spend your bonus check

The end of the year is fast approaching, and for many of us, that also means the anticipation of an annual bonus. Sure, the IRS gets a hefty portion of your annual bonus, but what you decide to do with the rest can set you up well for the upcoming year.

Have some fun with your bonus and then use the rest to fund your money goals for the new year.

Now is the time to start thinking about what you want to achieve next year. You might have big goals like buying a house or starting a new business, or small goals like paying off the last $5,000 on your student loans or saving a regular percentage of your paycheck each month. Whether your goal is big or small, your annual bonus check can get you started in the right direction towards financial success.

Beef Up Your ER Fund

Saving three to six months’ worth of expenses in an emergency fund is one of the best financial steps you can take. Without an emergency fund, you might be tempted to turn to your credit cards to fund any unexpected expenses that come your way. Credit cards usually come with high interest rates that can turn your emergency into an even bigger expense if you can’t pay it off on time.

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Don’t panic if you are a little low on savings for your emergency fund. You can use your annual bonus to beef up your savings and fill in any gaps. Set aside a certain percentage for your ER fund and use the rest to fund other money goals on the horizon (or, to have a little fun).

Ask yourself:

  • How much have I saved in my emergency fund?
  • What percentage of my bonus do I need to fill in any gaps?
  • Is my emergency fund savings in a separate savings account?

Make an Excess Contribution to Your 401(K)

The beauty of contributing to your 401(k) is saving for retirement and lowering your taxable income all at the same time since contributions are made pre-tax. You’ll certainly want to contribute up to your company match (if your company offers a match, it’s essentially free money to you) since matching funds are the next best thing since peanut butter and jelly.

Find out from your human resource department what you need to do to make an excess contribution to your 401(k) before the end of the year. Again, if you’re within the contribution limits for the year ($18,000 in 2018, $18,500 in 2019, if you’re under 50), you can contribute your entire bonus check or a percentage.

Ask yourself:

  • How much have I contributed to my 401(k)?
  • Have I taken advantage of my company match?
  • What percentage of my bonus do I need to fill in any gaps?

Pay Down Debt With High-Interest Rates

High-interest rates are the bad guys working against your bank account. High-interest rates mean that you’ll pay more for something you purchase if you don’t pay it all off within the billing cycle. Interest rates have risen this year, and you’ll see that reflected in the interest rates for credit cards and any other variable interest rate loans.

You need an action plan if you’re going to tackle high-interest-rate debt. There are loads of calculators you can use to figure out how much you need to allocate toward your debt to pay it off rapidly. If your annual bonus won’t pay off all your debt, set up a category on your budget for excess debt payoff so you will stay on track.

Ask yourself:

  • Which debt has the highest interest rate? (Hint, start with this debt.)
  • How much of my annual bonus should I allocate to debt payoff?

Don’t let your annual bonus go to waste. Sure, have some fun with your bonus and then use the rest to fund your money goals for the new year. You’ll be making a smart money move whether you use your bonus to beef up your ER fund, contribute to your retirement plan or to pay off high-interest debt.