There’s nothing better than kicking off a fresh new year with a clean slate. That is, unless you start it off with some extra cash lining your pocket. While some companies reward their employees during the holidays with decadent parties and paid time off, many offer a year-end cash bonus. Before you spend it all in one place, take a moment to think about the best use for your hard-earned prize. It is a new year, new you, after all. To get you started, these ideas will help you spend your bonus wisely this year.
1. Boost your retirement savings.
Whether you contribute to an IRA or a 401(k), maximizing your retirement savings is crucial. For one, these retirement vehicles incentivize you to save by offering tax breaks. Plus, it’s important to remember that your employer will match a portion of your contributions. This is a major perk of your benefits package, so take advantage of it! If you contribute less than your employer matches, use your bonus to bump yourself up to a new threshold. The earlier you tuck some cash away, the more exponentially it will grow with compound interest.
2. Pay off credit card debt.
Credit card debt will sabotage your financial health. I just can’t emphasize that enough. Interest rates on credit cards are sky-high, and the longer you owe money, the more it snowballs into something unmanageable. Applying a chunk of your bonus to debt paydown can save you hundreds or thousands down the road. While you’re at it, practicing these responsible credit card habits will help you emerge from a hole and teach you to use credit cards to build your credit history rather than destroy it.
3. Start a rainy day fund.
Even those of us living in sunny Austin, Texas need a rainy day fund. This is a pile of savings reserved for the unexpected. Let’s say your salary takes a hit. Or your AC breaks in the middle of summer. Since you can’t access your retirement savings (without penalty) until later in life, you need a stockpile you can access today. Consider using some of your bonus to prepare for the uncontrollable financial pressures that come and go throughout your life. Ultimately, you’ll want to work your way up to having 3 to 6 months of living expenses in your rainy day fund.
4. Invest in yourself.
I’m all for honoring your successes. And earning a bonus is a milestone worth celebrating! But instead of buying yourself a pocketbook or that pair of heels you’ve been eyeing (though that’s OK too!), think about ways you can treat yourself in a developmental way. That is, making yourself a healthier, more-well-rounded person. Maybe that means investing in a pack of spin classes. Or adding a new stack of self-help books to your nightstand. I like to use extra cash to enroll in online courses offered by Coursera or Udemy to expand my skillset and keep it relevant. However you decide to invest in yourself, using your bonus to make yourself healthier, happier, and more knowledgeable will certainly pay dividends for you down the road.