What's the Best Use for a Bonus?

Key Points

  • A bonus is well-deserved extra money, but it's also an opportunity to add to your overall financial well-being.

  • It's not just a question of spend or save. With a little thought, you can use your bonus for practical things and still have a little fun.

  • Just as with all your finances, managing a bonus is a matter of planning and prioritizing.  

Dear Carrie,

I just received my first ever bonus. I don’t want to squander it, but also want to have some fun. Your thoughts?  – A Reader

Dear Reader,

First, congratulation on two fronts—one for getting your first bonus (obviously you earned it!) and two for being thoughtful about what to do with it. It's tempting to treat extra cash like fun money, but it's wise to consider any windfall—whether a bonus, an inheritance, or a tax refund—as an opportunity to add to your overall financial well being. 

That said, how you use your bonus doesn't have to be either/or. With a little thought, you can shore up your finances a bit and also treat yourself to something special. Here are some guidelines you can use to make sure you’re making the most of your well-earned money. 

Create a saving/spending plan

First, be honest about your current finances. Are all your basic needs covered? Do you need to jumpstart your savings? Are you deeply in debt? This will help you decide how to use your bonus money to your best advantage. 

One approach is to come up with a percentage system. For instance, depending on your circumstances, you might decide to put 50 percent toward savings, 30 percent towards debt reduction, and 20 percent toward your next vacation. Of course, if your credit card bills are out of control, you might adjust those percentages and put paying off your credit balances at the top of the list, but you get the idea.

Don’t let the money sit in your checking account

Extra cash in your checking account can easily disappear if you're not careful. So while you're trying to decide what to do, put that money in a separate account like a savings account. That way you won't be tempted to buy something extra or unconsciously dip into this cash for everyday things. Seeing that solid figure in your separate account can also be a motivation to make the most of it.

Prioritize where you'll save

It's great to have extra money for savings, but it's even better to decide how to prioritize what to save for first. Here's my recommendation:

  1. Emergency fund—A rainy day fund is essential in case of an illness or unexpected job loss. Ideally, you want to have cash set aside to cover three to six months of essential expenses. Is your emergency fund low or nonexistent? Put a big chunk of your bonus money in an easily accessible account—and don't touch it unless absolutely necessary.
  2. Retirement account—Got the emergency fund covered? Look to the future. If you have a 401(k), here's a chance to add even more to it. It's possible your employer will automatically deduct from your bonus whatever percentage you're contributing regularly, but you can also request to have more put into your 401(k). You could also open an IRA and put up to $5,500 in for the 2017 tax year. 
  3. Personal savings goals—If your emergency fund and retirement savings are taken care of, think about your personal savings goals. A house? A car? Maybe even tuition for that advanced degree you've been considering. 

Depending on the size of your bonus, you might be able to make contributions to all three goals. The main thing is to do it thoughtfully. 

Think carefully about what would make you happiest

While a bonus should be used wisely, it's obviously the result of your hard work and you deserve to enjoy it as well. So as practical as you may be, don’t hesitate to carve out a reasonable portion for yourself. But here again, it's best to have a plan so the money doesn't just disappear on extra lattes.

You can make the "fun" part of your bonus that much more rewarding by thinking about what would give you the most satisfaction. Often an experience is a much more lasting pleasure whether it's a night out with friends or family or a major vacation. But if a new laptop or an expensive pair of shoes will make you feel the best, go for it. 

Ultimately, the way you manage your bonus is a lot like the way you manage the rest of your finances. You need to have a plan, prioritize how you spend and save, and be mindful of both the present and the future. Your specific choices will depend a lot on your goals. And if you keep those goals in mind, you should be happy with the result.

Have a personal finance question? Email us at askcarrie@schwab.com for future topic consideration.

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