The end of the year is near and that means it’s holiday bonus time! If you’re fortunate enough to receive a bonus this year, there are three very important things you should consider doing with it above all else.
First, if you have any outstanding debt such as school loans, credit cards, automobile loans or even a mortgage, use at least some of your bonus to pay down that debt faster. The higher the interest rate on the loan, the more it can negatively impact your financial situation over the long run. By paying down any interest bearing debts faster, you are seriously doing your future self a favor. If the debt has a high interest rate or lengthy term, it’s possible that by using your bonus to pay it down quicker you may ultimately save even more in interest over the long run.
If you don’t have any debts to payoff, the next best thing to do with a bonus is to simply save it by adding it to your cash reserves. The goal is to maintain at least three to six months worth of your living expenses in a liquid, readily available account. Whether you call it your savings, a slush fund, or a rainy day account, when life happens and you need to cover an unplanned expense you’ll have the means to do so without having to use the credit card or borrow money.
Assuming you have these bases covered, the next best thing to do with a bonus is to invest it for your future. Start by investing it for retirement by allocating it to an employer sponsored retirement plan, such as a 401(k), or direct it towards an individual retirement account such as an IRA or Roth IRA. There may be tax benefits for doing so which could make it even more beneficial to do. If you’ve already maximized your retirement contributions for the year you can simply use a non retirement account to invest the money. Ultimately by saving your bonus instead of spending it you’ve made a smart decision that will benefit your future.