It’s always nice to get a bonus at work. You get some extra money to use however you’d like, and it’s a sign that you’re doing well at your job.
But it’s also normal to feel unsure about what to do with that money. You might be torn between rewarding yourself and the more responsible option of putting that money toward personal finance goals. The good news is that you don’t need to choose. There are plenty of smart ways to use a bonus, and in this case, you can have your cake and eat it, too.
1. Split it between financial goals and rewarding yourself
Some people take an all-or-nothing approach with bonuses. The ones who aren’t so financially inclined spend it all. The ones who are working hard to get ahead financially use it all for things like saving, investing, and paying down debt.
Why not do both? Use a portion of your bonus for any financial goals you have. Use the rest to reward yourself in any way you’d like — take a vacation, buy a new TV, it’s entirely up to you.
You could split your bonus down the middle, 50-50. Or, you could go with any other split that you like.
2. Add to your emergency fund
Most adults don’t have enough money in their emergency fund. The typical recommendation is to have enough emergency savings to pay for three to six months of living expenses.
Unfortunately, savings have been moving in the wrong direction. The median savings account balance was $1,200 in 2023, down from $4,500 in 2022, according to research by The Motley Fool Ascent.
If you don’t have at least three months of living expenses in your emergency fund, add to it with your bonus. You’ll be better prepared for any surprise bills, which could help you stay out of debt.
3. Contribute to an IRA
It’s rarely a bad idea to save more for retirement. Social Security benefits are only enough to replace about 40% of pre-retirement earnings, on average.
Consider using your bonus to fund an individual retirement account (IRA). IRA contribution limits in 2024 are $7,000 for those under 50, and $8,000 for those 50 and older. There are two types of IRAs available to most workers, each with certain tax advantages:
- Traditional IRAs: When you contribute to a traditional IRA, you can deduct contributions from your taxable income. Withdrawals in retirement are taxed as ordinary income.
- Roth IRAs: Withdrawals in retirement from a Roth IRA are tax-free. You can’t deduct contributions from your taxable income.
4. Pay down credit card debt
If you have any credit card debt, a bonus is a great way to pay it down. This is one of the most expensive types of debt. The average credit card interest rate is a staggering 21.47%, according to the Federal Reserve.
Let’s say you have $5,000 in credit card balances. The APR is 21%, and you’re paying $300 a month. At the rate you’re going, it will take you 20 months to pay off your debt, and it will cost you $963 in interest.
Now imagine you’re able to put $2,000 in bonus money toward your debt. You continue paying $300 a month toward the last $3,000 in debt. It will only take you 11 months to pay off your debt, and it will cost you $327 in interest. Thanks to that bonus, you’re out of debt nine months earlier and save $636.
5. Put it toward something special
As mentioned earlier, you can and should use some of your bonus money to reward yourself. And you can do that however you want. But if it’s a large bonus, consider using it for something that’s really going to wow you. Here are a few examples to get the ball rolling:
- Flying business class to that destination you’ve always dreamed of visiting
- Buying a nice watch or piece of jewelry
- Treating yourself and your loved ones to dinner at a fancy restaurant
It’s good to think about exactly how you want to reward yourself. Otherwise, you may end up just spending your bonus here and there, and then wishing you had planned more once the money’s gone.
Figuring out the best way to use a bonus can be fun. Start by deciding how much you’ll use for your money goals and how much will be spent on yourself. Then, you can think about your most pressing goals and also how you can use that extra money for something amazing.
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