Jamie Cattanach is a personal finance and frugality writer who spent more than a year on-staff with The Penny Hoarder. Here, she shares ideas from 10 money experts about smart (and fun!) ways to use financial windfalls like a holiday bonus.
How did you spend your first paycheck? Many of us aren’t proud of our answers.
If you had your first job at 16 or 17, your financial priorities may have left a lot to be desired. (Mine, for one, primarily involved video games, lip gloss, and candy.)
Ideally, though, we learn how to better allocate our funds as we grow up and take responsibility for our own bills and necessities. In time, we recognize the importance of creating a budget, carefully tracking our spending, finding saving strategies that work for us, and planning for our financial future.
But when we receive a financial windfall like an end-of-year bonus, all that diligence can go out the window.
What Should I Do With My Bonus?
Holiday bonus checks average out to more than $1,000—an amount that certainly qualifies as a windfall for most of us.
And unless you want to repeat your potentially regrettable first-paycheck decisions, it’s a good idea to create an action plan for your extra money.
We asked 10 financial geeks and gurus for their best advice on how to spend, stash, and save your holiday bonus.
Here’s what they said.
DON’T SPEND IT ALL IN ONE PLACE.
Just because it’s one check doesn’t mean you have to spend it all on one thing. But if you’re not sure what the smartest thing to do with your bonus is, it helps to have some guidelines.
SPLIT THE BONUS INTO SHORT-TERM AND LONG-TERM PLANNING.
Try to think about your bonus in terms of both present-day needs and long-term goals, suggests Andrew Rafal, founder and president of Bayntree Wealth Advisors.
You could, for instance, put some of the check towards Christmas gifts now, but also save a portion of the check in your emergency fund for later.
“The key is to have the right combination of short-term gratification and long-term thinking,“ says Rafal.
USE “THE 50/50 RULE.”
You know you should use your bonus responsibly… but you did work hard for the money, so it’s natural to want to spend some of it now, relates Michelle Waymire, financial advisor and coach for Young + Scrappy.
The important thing is to temper that impulsivity with prudence.
“If you’re tempted to splurge but aren’t sure how much you should, the 50/50 rule can be very useful,” says Waymire. “Spend 50 percent of your bonus on an important financial goal, and the other 50 percent can be spent however you want!”
PAY OFF DEBT.
In the hole? Extra cash can go a long way toward lifting yourself back out and getting on the right path toward financial freedom.
If you have credit card debt, make paying it off a top priority.
One thing almost all of the experts agreed on? If you have revolving credit card debt, then the smartest play would be using your bonus to help pay it off.
Because as long as you’re paying those hefty monthly interest fees, explains Kristin McGrath, Editor of CreditCardForum, you’re hobbling your efforts to save up for other purchases and investments.
“The more motivated you are to pay off your debt, the more fun you can have with your next bonus,” McGrath added.
Who knows? Next year’s check could go toward your dream vacation or a new tablet. Good incentive, huh?
DITCH STUDENT DEBT.
“The first thing people should do before investing,” says blogger and founder of My Millennial Guide, Brian Meiggs, “is pay off their existing debt.”
After all, many personal investments, like the purchase of a home or car, involve going further into debt before breaking even. And once you’re not constantly trying to stay ahead of monthly payments, you can put more money toward whatever else you’re saving for.
For those in the 25-36 crowd, “existing debt” usually means student loans. Meiggs feels your pain: He was saddled with $30,000 worth of student loan debt but paid it all off in just 12 months.
How, you ask? Along with strict and careful budgeting, he diligently used any windfalls to pay it off. If he received a bonus check—even a generous one—the entire amount went towards paying down student loans.
GET READY FOR A RAINY DAY.
If you don’t have an emergency fund yet, this is the perfect time to start one.
GET AHEAD OF “MURPHY’S LAW.”
“Emergencies always happen!” says Abby Eisenkraft, CEO of Choice Tax Solutions, Inc., and anyone who’s been on a few trips around the sun knows she’s right.
By stashing three-to-six months worth of living expenses, you won’t have to sweat if you lose your job, experience a medical emergency, or even if your air conditioner breaks down in August.
Put it in a liquid account you can access—but absolutely won’t, unless it’s a real emergency!
TREAT YOURSELF (OR SOMEONE ELSE)!
Life is short—and sometimes, money can buy a little bit of happiness.
HELP FAMILIES IN NEED.
When’s the last time you had the chance to give to charity?
“Holidays are a great time to give extra—or any—to help families in need,” says Debbi King, author of The ABCs of Personal Finance. Charity ties in with holiday spirit, and everybody faces extra expenses at the end of the year. Your bonus check gives you the power to make a real difference in someone’s life. (Just in case you need a little extra reason to get in the giving spirit, many donations are tax-deductible! Check with your tax advisor to find out more.)
BUY THIS YEAR’S HOLIDAY GIFTS.
Speaking of end-of-year expenses, what better way to use your seasonal bonus than to get ahead on your holiday shopping?
“It always feels like Christmas creeps up on us,” says Kelly Anne Smith, junior writer and engagement specialist for The Penny Hoarder. “Using your holiday bonus as your gift budget can be a great way to give without charging gifts to your credit card.”
FINALLY BOOK THOSE FLIGHTS.
Most of us are saving up for something fun. Whether it’s a vacation or a new gadget, it’s okay to put part of your bonus toward that well-earned splurge!
And if you’ve been grinding away toward a specific savings goal, a holiday bonus is a great way to top up the coffer.
“A seasonal windfall can help you boost a savings fund you’ve been contributing to for a while,” says Lisa Rowan, writer and producer for The Penny Hoarder. Maybe an extra $1,000 is exactly what you needed to finally reach your goal, so you can make the down payment on that new car or upgrade your laptop.
“Just remember that a holiday bonus is considered to be a part of your compensation,” Rowan reminds us. “So if you haven’t received a bonus in your paycheck before, get ready to have taxes deducted before you see those pretty pennies.”
With all these smart things to do with your money, how will you spend your bonus check this year?