Does your company provide you with an annual bonus during the holidays? If so, you might want to consider some smart ways to make it work for you.
Most of us are familiar with the scene in National Lampoon’s Christmas Vacation in which Clark Griswold has plans for his bonus but doesn’t receive one until drastic actions are taken by his cousin-in-law. Unless you’ve got big plans for your bonus, you might start by making this money work for you and use this “extra” money to do something to help your current financial situation.
Here are some great ways to let your annual bonus work for you into the New Year.
Knock out some debt
Although the holidays tend to be a time of excessive spending with credit cards maxed out, you can change things going into the New Year. Use that additional money to pay down or pay off your credit card debt, especially if you have balances with high interest rates. In some cases, you’ll be able to pay off the debt entirely and create a new feeling of financial freedom with credit cards that have been paid off.
Add more to your retirement account
Are you planning for the future? Do you have a retirement fund that should help you live out your golden years without being employed or relying on Social Security? Add some of the annual bonus money to this account and let it help you enjoy the tax breaks associated with putting money into this account. If your job matches money in your 401(k) or other retirement savings, double your money by starting with these accounts. This is a great way to make your bonus work for you.
Spread your money out with an index fund
Some may advise you to put money into a specific stock, but if that one stock drops, so does your money. Instead of a singular investment stock, consider an index fund that is taxable and broadly diversified. These funds are based on a pre-selected collection of stocks, which typically means your money is safer because several companies are part of the fund instead of a singular stock. By buying into the fund, you get the return of the index, which often averages 10 percent annually.
How does your emergency fund look?
Do you have an emergency fund? Before you can focus on paying down debt, investing for the future, or building a stock portfolio, you need to have an emergency fund that can take care of things whenever an emergency arises. The starting point for an emergency fund is $1,000, which could come right out of your annual bonus. This is money you don’t touch unless you have an actual emergency. Eventually, this fund should grow to represent three to six months of expenses, but start with $1,000 and get the ball rolling.
Build your college savings plan
Most states allow you to contribute to a 529 college savings plan without the need to pay taxes on the investment. If you have young kids or plan to have kids in the future, this is a great way to help them have a college plan that can help pay for their schooling when the time comes. A 529 plan isn’t generally impacted by market volatility, making this a great place for you to put in extra cash.
Open a high-yield savings account
The longer you let your annual bonus money sit in your regular checking or savings account, the sooner you’ll spend it and wonder where all that money went. Instead of spending this money, open a high-yield savings account and let your money begin to earn interest for you. You could choose a CD, which pays much higher interest rates than regular savings accounts. This is a great way to keep from spending the bonus money.
Get your next vacation fund started
If you want to do something fun with your annual bonus, put it in an account that is specifically earmarked for your next vacation. If the amount is large enough, you might want this next vacation to be something you’ve always dreamed of doing but have never been able to. A high-yield savings account or short-term CD is a great choice for your vacation fun. Once you’ve got the fund started, consider opening a travel rewards credit card to build up some rewards during your trip.
These are only seven ways you can make your annual bonus work for you and begin to help you have a bit more financial freedom. How will you use your bonus this year?
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