So, what SHOULD you do with your holiday bonus?
1) Eliminate Debt:
While definitely not fun to talk about, using this money to pay down debt, (whether credit card, student loans etc.) can have a huge impact on available cash you have throughout the year. As a general rule, the best thing to do is pay down the debt with the highest interest rate first. The benefit is two-fold: you’ll be surprised how guilt free you will feel to spend in the future without this burden hanging over you.
2) Set up a Rainy Day Savings Account:
Create an additional bank account to deposit your bonus into. Label it "Emergency Funds" or "Rainy Day Savings". We all know throughout the year unexpected expenses occur. This account will help you avoid wreaking havoc on your budget. Ideally you want to fund this account with enough cash to cover your expenses for the number of months you believe it would take you to find a new job in the event you unexpectedly lost yours. For example. Let's say your monthly expenses (the stuff you have to pay like rent, utilities, groceries, etc) are around $3500 and in your industry, you could find a new job within 3-4 months if you were laid off. Your Rainy Day/Emergency Fund should hold $10,5000-$14,000.
My bonus IS NOT enough to cover that.
What to do if your bonus isn't enough to cover both of those amounts? We suggest the following ratio: 50% to your debt, 30% to your emergency find and 20% to discretionary (yes, we're saying it's okay to splurge at Jean-George's new restaurant ABC Home Grown).
My bonus IS big enough to cover that.
If your bonus is big enough to fund both those amounts or finishing funding them if you've already started, keep reading for what to do with what's left over.
Now that that's out of the way, pat yourself on the back. Your doing great! You've paid down your debt and set up an emergency fund so it’s time to enjoy a little of that bonus on yourself. Try to resist spending all of what remains but go ahead - indulge! An occasional indulgence helps us avoid those larger splurges so whether it’s a trip with friends, a pair of new jeans or upgrading your iPhone... treat yourself. But to enjoy that purchase or splurge guilt-free, consider putting some of the money into one of the following 3 things.
1) An Investment Account: Anything is better than nothing.
If you're not invested in real estate and you prefer doing things that are admissible by US law (ahem..), this is one of the few places you can make your money work for you. Why settle for it’s current value when it could be worth more in the future? Many people think of the stock market like they do a casino: the odds are always in the favor of the house. But it's simply not true. That means we DO NOT suggest speculative investing but rather a methodical and consistent contribution to a broad based diversified allocation that can benefit in multiple economic environments. (You've heard people say "don't put all your eggs in one basket"). It's a good idea to consult a financial professional but before taking their advice make sure they share your investment philosophy however aggressive or conservative that may be. They will be able to help you calculate how much risk you need to take to achieve your investment goals - and it may be less than you think.
2) Contribute to an IRA or 401K.
Some employers let you automatically deposit a portion of your bonus into a 401K. Just as a refresher, a 401K is a qualified investment account. What that really means is that it's an account in which you can contribute a portion of your earning before they are taxed (PRE-TAX). Most often, your employer will match a percentage of your contribution which essentially means they are giving you free money. Take advantage of that!!! If your employer doesn't offer a 401K, consider depositing some funds into your IRA account. Depending on your income you will get a tax deduction for this contribution, which results in a similar effect to a 401K pre-tax contribution.
3) Investing in YOU!
Maybe getting an extra degree could help you get a higher paying job. Maybe you’ve wanted to learn a new language or obtain an additional certification in your industry. Use the money to invest in yourself. In the end it may lead to greater happiness, a better job, or more money in your current job. Another guilt free way to spend that bonus.