One strategy is to treat a bonus as if you never got it. In other words, put it in your savings account or your investments and forget about it. Or you may want to enjoy this extra money a little before putting it toward savings or debt. Before letting your annual bonus burn a hole in your pocket, you may want to consider the following first:
1. Pay your debt first
If you need your annual bonus to cover your bills, mortgage payments, or holiday spending, you likely don’t have much room in your budget for a vacation or gift for yourself. In this case, putting your entire bonus toward your debt may help get you into a better financial position.
While this may not be the most “fun” option, or what you had pictured as the reward for all your hard work, allocating a bonus for regular, everyday expenses is actually how many consumers choose to use this extra money. By committing this bonus to your debt, you may be able to gain some breathing room with your finances.
2. Save it with a plan
Some consumers, though, may have specific plans for their finances, and a bonus can be a big help. If you’ve been saving to make a big purchase such as a new automobile, a vacation or home improvement project, this extra money may be best used for those goals.
You might also be saving for something less tangible, such as early retirement, your child’s education, applying it toward your income taxes if necessary, or paying off your mortgage. If you already have a plan like this, the thought of making a big jump toward accomplishing your goal may be enough to convince you to spend your annual bonus this way.
3. Use some, save the rest
For many people, using an entire bonus to pay off a debt or save for the future might be a good move, but if they don’t feel some kind of benefit from their bonus, that approach may not feel like much of a reward for the year of hard work.
If you’re like this, then fortunately you may be able to be both frugal and indulgent with your extra income. You can consider making a plan for your bonus money, such as committing a certain portion to splurge on yourself and then putting the rest toward a future financial goal. For example, maybe you spend one-third of your bonus on a day of relaxation at the golf course, shopping without guilt, or buying something for a hobby you enjoy, while the other two-thirds goes into your savings account.
The best option for your bonus will depend on your unique financial situation, but considering these strategies may help you narrow your choices and make a decision to not waste the money on unimportant things.
While it can be tempting to spend your entire bonus on something extravagant, a lump-sum bonus is an opportunity to commit yourself to improving your finances. Whether this means trying to pay off your debts or sticking to a savings goal, this can be an opportunity to make good decision-making with your money a habit.
Dustin Pellegrini is a senior web producer and writer at Think Glink Media, where he specializes in reporting on identity protection and credit. He studied writing and visual media at Columbia College Chicago.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.