Many employers pay a year-end bonus as a reward to employees for their hard work and dedication throughout the year. After laboring all year long, most people think about splurging the bonus, but there may be some better ways to put the money to good use.
Put it aside for taxes. After it’s added to the salary you earned throughout the year, a year-end bonus may push you into a new tax bracket. You could end up with a tax debt once you file next April. Keeping the bonus in a savings account will ensure you’re able to pay any tax liability you end up with.
Pay off high interest rate debt. Paying off debt can be tough, especially when you have to pay multiple balances. A year-end bonus is a great way to knock out a credit card balance or two. You’ll save money on interest and free up those monthly payments to pay off your remaining debt.
Invest. Depending on when you receive the bonus, you may able to make a contribution to your 401(k) or IRA and receive a tax benefit for the investment. Investing the money will put you closer to your overall retirement goal.
Build your emergency fund. Most people need to have three to six months of living expenses saved up in case of a job loss, temporary loss of income, or major expenses. A year-end bonus is a great way to beef up your emergency fund and get closer to your ideal safety cushion.
Catch up on past due bills. If you’ve been struggling to make ends meet, a year-end bonus is a great way to get caught up again. Take inventory of the accounts that are past due and use your bonus to take care of the outstanding balance.
Get a secured credit card. People with a poor credit score can have trouble getting approved for a credit card. A secured credit card is an alternative, but it requires you to make a security deposit. Using your year end bonus to get a secured credit card can help you open a new credit card and improve your credit.
Donate to charity. While there may be a tax benefit to making a charitable contribution, it also feels good knowing that you’ve donated some of your money to a good cause.
Have a little fun. Being frugal all the time can be frustrating. It’s OK to set aside a small percentage of your year-end bonus for some spending money. Just make sure first use the majority of your funds to improve your finances.