5 smart ways to use a year-end bonus
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Are you expecting a year-end bonus? If so, you’re probably dreaming up all the ways you could spend that windfall.
The average bonus was $2,447 in December 2023, according to payroll company Gusto. That’s a sizeable chunk of change — one that could put you in a better place financially in 2025 with proper planning.
If you expect a bonus to land in your account soon, it may be tempting to splurge. And that’s perfectly fine. After all, you deserve a reward after working hard all year.
However, before you make an impulsive purchase, consider a few ways you could use those funds to improve your financial situation.
In today’s high interest rate environment, it’s expensive to carry debt. And the higher the interest rates you’re paying, the faster that debt balance can grow.
So, consider using your end-of-year bonus to pay off some of your debts. Not only does this clear your balance faster, but it also saves you money in interest over time.
For example, say you have $3,000 in credit card debt at 21% APR. If you took 12 months to pay off that debt, you’d pay $279 per month and spend about $352 in interest (assuming you don’t make any new purchases on the card).
Now let’s say you receive a $2,000 bonus and use it to pay down your credit card balance to $1,000. In this case, you’d only need to pay $93 per month to eliminate your balance in one year. And you’d pay just $117 in interest — a savings of $235.
Read more: What's more important: Saving money or paying off debt?
If you’re not sure what to do with your bonus money, you shouldn’t feel pressured to use it right away. You can set it aside in a bank account while you decide. However, if your money is going to sit in the bank, you should at least earn interest and help it grow without any work on your part.
Following the Federal Reserve’s recent rate cuts, deposit account rates are on the decline. Still, there are plenty of high-yield savings accounts, money market accounts, and certificates of deposit (CDs) that pay upwards of 4% APY (or even more). Take some time to compare today’s rates and account options and put your bonus in an account that will help it grow.
See our picks for the best account options today:
10 best high-yield savings accounts
10 best high-yield money market accounts
The best CD rates on the market today
It’s important to have a financial safety net in the event of a financial emergency, such as a car repair or job loss. An emergency fund can help you keep your budget intact and avoid taking on new debt to cover a surprise expense.
It’s typically recommended that you keep enough money in your emergency fund to cover three to six months’ worth of living expenses, though you might need more in certain situations. If you don’t already have an adequate emergency fund in place, a year-end bonus could help you get started.
Read more: How much money should I have in an emergency savings account?
One of the best things you can do for Future You is invest for your golden years. In particular, retirement accounts such as 401(k)s and IRAs are a good option because you can contribute pre-tax dollars, which allows you to lower your tax bill in April (or get a bigger refund), as well as defer taxes until you make withdrawals.
For the 2024 tax year, you can contribute up to $23,000 in a 401(k), and an extra $7,000 if you’re age 50 or older. If you haven’t prioritized saving for retirement in the past, or you want to take full advantage of an employer match, you can ask your payroll department to direct some or all of your bonus to your account.
Read more: 401(k) vs. IRA: The differences and how to choose which is right for you
As we mentioned, there’s no harm in splurging once in a while, as long as your financial obligations are squared away.
If you don’t want to feel like you’re depriving yourself, set aside half of your bonus for a “responsible” purpose and use the other half however you’d like. This can give you the momentum you need to stay the course when it comes to your financial goals, while still enjoying the fruits of your labor.
Read more: How much of your paycheck should you save?
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