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5 smart ways to use your holiday bonus

December 21, 2022, 2:36 PM UTC
Photo illustration of a paper airplane made of a 100 dollar bill hitting the bullseye on a dartboard.
It's not a crime to take a portion of your bonus and use it for a small splurge.
Photo illustration by Fortune; Original photos by Getty Images (2)

One of the most exciting times during the holiday season is when your employer surprises you with a generous end-of-year bonus. If you’re counting down the seconds until your bonus hits your bank account, you may want to pause and use this time to make a plan for how you’ll spend it. Having extra funds in your bank account without a plan can lead to frivolous spending that you’ll regret later. 

Experts recommend putting pen to paper and coming up with a clear roadmap. 

“List out your goals and needs in order of priority and time frame to help structure how you want to move forward,” says Nicole T. Strbich, a certified financial planner and managing director of financial planning for Buckingham Advisors. “Prioritize any short-term goals or needs that are underfunded (e.g. your emergency fund or high-interest debt) and any goals where you can get a benefit by funding them now (e.g. an employer match for contributions or long-term goals that you can reap the benefit of compounding growth). Once you have the plan designed, move forward to allocate the funds before a spending ‘want’ comes up.”

How much are holiday bonuses?

Holiday bonuses are given to employees at the end of the year in the form of a check, gift card, or additional payment made through direct deposit. They’re usually a set percentage of your annual salary, though some companies may give you a bigger bonus depending on your performance for the year. The latest data from GoBankingRates puts the average holiday bonus at roughly $1,800, although it could range anywhere between $100 to $5,000, depending on a number of factors including your salary, position, company size, and more. 

5 ways to put your holiday bonus to good use 

If you’re looking for the best ways to use your holiday bonus money, consider the following: 

  1. Donate it. If you don’t need the money, one way to earn some good karma points and a tax deduction is to donate it to charity. If you itemize your taxes, you can reduce your taxable income and your tax bill by donating to a qualifying charitable organization
  2. Pay down high-interest debt. Debt like credit cards or personal loans can come with steep interest rates that can be expensive to carry month to month and drag out your repayment timeline. To add insult to injury: The Fed’s rate hikes this year tend to make the cost of borrowing even more expensive. Consider throwing your bonus at any lingering debt balances that are burning a hole in your monthly budget. Not only will it save you money month to month, but the faster you chip away at this debt, the less you’ll lose in interest payments over time. 
  3. Pay down student debt. Whether you’re currently paying off your student loans or taking advantage of the pause, putting your bonus toward your loans now can help you shave a little off the top of your tax bill come spring. You can take a tax deduction (up to a maximum of $2,500 a year) for the interest paid on any student loans that you took out for yourself, your spouse, or your dependent for higher education expenses 
  4. Put it into your emergency savings. Saving extra funds for a rainy day may not sound like a ton of fun, but it will save you from falling into a high-interest debt spiral when the inevitable happens and you have to cover the cost of an unexpected trip, a medical procedure, car repair, or the like. Experts suggest having at least three months’ worth of your living expenses, although the exact amount will vary depending on your personal expenses and income. 
  5. Save it for a bigger money goal. If starting a family or purchasing a new home is on the horizon, consider putting your bonus into an interest-earning account like a high-yield savings account, certificate of deposit (CD), or money market account to help your bonus grow until you need to use it. 

If you have the financial wiggle room, it’s not a crime to take a portion of your bonus and use it for a small splurge. In fact, this can be a good way to satisfy any desire you have to spend on an unnecessary purchase without overdoing it. But you should think carefully about how much you want to give yourself and how that will impact the progress you could make toward your financial goals. 

“It is important to have balance in your life, including your finances,” says Strbich. “When possible, allocate a reasonable portion of your bonus toward a fun goal or expense, while staying with the overall plan for the rest of the funds. This way you can enjoy some of the fruits of your hard work, while planning ahead and saving at the same time.”

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