What NOT to Do with Your Year End Bonus

Dear Rich Lifer,

According to a recent survey by recruiting agency Accounting Principles, which surveyed 500 US businesses, the average holiday bonus was $1,797.

If you received an end of year bonus, I suggest making a plan for the money before it shows up in your account.

While it’s easy to view the bonus as a windfall and spend it on a whim, you probably would benefit more from using the money in a few key areas, which is what I’m going to talk about today.

As a general rule, 25 cents of every dollar of your holiday bonus should be saved or invested. It’s best to think of your bonus as you would any other form of income.

Holiday bonuses can be just as dangerous as they are exciting. I’ve seen too many of my friends recklessly spend or poorly invest their bonuses and have nothing to show for it at the end of the month.

Before we get to my recommendations on how you can use your end-of-year bonus, let’s talk about what not to do first.

  1. Spend it all immediately.

There’s nothing wrong with spending your holiday bonus, but like I said, a good rule of thumb is to save or invest at least 25 percent. It’s important to enjoy the money you’ve earned but keep your long-term financial plan top of mind when you do.

  1. Pay off your debt last.

If you’re going to spend some of your bonus on fun stuff and some on paying off debt, don’t leave paying off your debt to the end.

Because 9 times out of 10, you’ll spend whatever you wished you’d set aside to lower your debt.

Take care of your debt first, then spend what’s leftover with no guilt.

  1. Invest in risky or volatile stocks.

Just because the money wasn’t expected doesn’t mean you should treat it any differently. I’ve seen too many friends blow their holiday bonus on dumb investments. Risky stocks that are get-rich-quick moonshots. Had they invested their bonus how they normally invest their regular income, they’d have made solid returns. You worked hard for your bonus, don’t make stupid decisions with it because it feels like free money.

Those are a few ways NOT to spend your holiday bonus. How should you use your end-of-year bonus then?

There are a few schools of thought here.

Serious money.

Some conservative financial advisors believe you should allocate 80% of your bonus to “serious money,” like paying off debts, maxing out your 401(K) and IRAs, and using the remaining 20% as guilt-free spending money.

Investments.

Less conservative types think as long as you allocate 25% of your bonus to savings and investments, you can do whatever you want with the rest.

I fall somewhere in between.

I think you should enjoy your holiday bonus since you’ve worked hard all year for it.

But, at the same time you don’t want the financial burden of completely neglecting your serious money categories.

Here are a few questions to ask yourself before your bonus arrives and how to navigate spending:

  1. Do you have credit card or other high-interest debt?

Yes. Allocate some of your bonus to paying off your debt first.

If you answered, no, move on to the next question…

  1. Do you have an emergency fund of at least 3 to 6 months worth of expenses saved up?

No. Set aside some of your bonus to build your emergency fund.

If you answered, yes, move on to the next question…

  1. Is your retirement fund maxed out for the year?

No. Add some of your bonus to your 401(k) or IRA.

If you answered, yes, move on to the next question…

  1. Do you have any long-term savings goals (car, house, vacation, college fund)?

Yes. Allocate some of your bonus toward your goals.

Whatever is left, you can either top up one of these serious money categories or spend as you wish.

A Few Final Thoughts:

If your financial house is in order, you might also consider donating your end-of-year bonus. Starting a 529 college savings plan or contributing to a trust fund for a child or grandchild can be a good move.

You could also help a loved one with an extra payment on a student loan or rent. Or, you could make a donation to one of your favorite charities. Depending on the organization, there might be an added tax benefit, plus some employers will even match your contribution. It’s worth checking with your HR department to find out if there’s any necessary paperwork.

Lastly, you should consider investing a small chunk of your holiday bonus into yourself this year. Think about your New Year’s resolutions and decide what’s required to achieve your goals. Then kickstart your plan by making an investment. It could be as simple as pre-paying for a few personal training sessions at a local gym or signing up for healthy cooking classes.

To a richer life,

Nilus Mattive

Nilus Mattive

You May Also Be Interested In:

Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

View More By Nilus Mattive