Save or Spend? 6 Things to Do With Your Holiday Bonus

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It might be the best gift of all: the holiday bonus. Nearly half of companies hand out holiday bonuses to their employees, according to CareerBuilder, and if you’re lucky enough to be on the receiving end of such a gift, you want to make the most of it. Whether you’re looking at an extra $500 or $5,000, it pays to be smart about how you use that extra cash.

With your bank account more flush than usual, it can be tempting to splurge on big, fun purchases, like a nice vacation or expensive gifts. But treating yourself may not always be the smartest financial move. Sometimes, saving your bonus is the wiser choice. Here are some guidelines for when to save your holiday bonus and when to spend it.

1. Save: If your emergency fund is depleted

Financial experts generally suggest having three to six months of living expenses set aside in an emergency fund. If your savings account is looking a little thin, fatten it up by setting aside all or most of your holiday bonus for a rainy day.

2. Spend: If you have credit card debt

If you have credit card debt, use your bonus money to pay it off. But as you do so, make sure you think about the spending patterns that got you into debt in the first place, so you don’t find yourself in the same position next year when your company’s bonus payouts may not be as generous.

Along the same lines, don’t make the mistake of spending your bonus before you get it. After all, the big check you’re expecting could actually turn out to be a membership in a jelly of the month club.

3. Save: If you’re behind on your retirement contributions

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Retirement savings slackers can take a bonus and make an extra contribution to their 401(k) or IRA. It won’t be enough to make up for not saving regularly, but it will help a bit. If your employer matches your retirement contributions, you can increase the value of your bonus even more by squirreling it away in your 401(k).

“If someone 25 years old took $5,000 of their bonus and invested it until they were 65 and earned 8%, they’d end up with $108,622,” Scott Stratton, a financial planner in Dallas, told Daily Finance.

4. Spend: If you want to give to charity

The holidays are a time for giving, and donating some of your holiday bonus money to a good cause can be the perfect way to participate in the spirit of the season (plus, you may get some tax benefits). Just make sure that you do your research before you donate – some charities are better run than others, and a few are outright scams. Use tools like the Better Business Bureau’s Wise Giving Alliance and Charity Navigator to evaluate a nonprofit before you give.

5. Save: If you have a big financial goal on your to-do list

Engagement ring, wedding, kid’s college fund, starting a business, a down payment for a house, a dream vacation. Chances are, you’re saving for some big financial goal right now, and you’ll get there faster if you allocate your your windfall for that purpose.

6. Spend: If you’ve earned a splurge

man with shopping bags
Source: iStock

Being smart about managing your money is a good thing, but focus too much on budgeting, debt payoff, and saving and you might fall victim to “frugal fatigue.” Even if you want to use most of bonus to pay down debt or save for the future, set aside a bit for something fun, like concert tickets or a weekend getaway. If you can afford it, the occasional splurge is the perfect way to reward yourself for making financially responsible decisions the rest of the time.

“We save for the purpose of spending – in the future. So if you’re on track – if you’ve generated thoughtful spending goals and consistently meet them – then you should be able to spend without guilt,” Tim Maurer, director of personal finance at the BAM Alliance, told CNBC.

So, go ahead and treat yourself to something special with your bonus money. Just don’t squander it all.

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