Many people get a large or small bonus around this time of year. It’s super tempting to go and spend it all on something fun or even something you think you “need.” Especially when it’s a performance-based bonus, it’s easy to convince yourself that you “deserve” to spend all of it on something really fun or frivolous.
But, you know what you really deserve? The biggest gift you can give yourself and your family?
Financial freedom and security.
Plan Ahead for Maximum Responsibility
BEFORE you get a bonus or other large amounts of “extra money” is the best time to decide where it should go to make the most meaningful impact on your finances. Large amounts can make the biggest dents in any debt or savings goal and have the bonus (get it?) of making you feel like making real progress. Small amounts DO add up, but it’s much harder to see the progress.
Are you one of the lucky few to get a holiday bonus this year? Fingers crossed that I get one this year!
So… what to do with that extra cash?
Here is what I suggest:
If you have a lot of debt, then the best thing is to put it towards that. Large amounts can really move the needle on your debt repayment plan and will lower your overall interest paid pretty significantly. Put it all towards one of your bills.
You can put it towards the debt with the highest interest rate, or you can follow the Snowball Plan (part of Dave Ramsey’s Baby Steps) and put it towards the smallest debt you have. But whichever debt you decided to pay off- put it there! Even if you are not in a strict paying off debt mode- paying off debt is one of the best ways to free up money and reach financial security and freedom.
If you don’t have any debt (good for you!), then you have some options (isn’t it great to have choices!?)
- First of all, take off 10% and put it towards charity. I always make charity a priority in my life. I have a few organizations that I like to give to, and I also give to individuals I know are struggling with.
- Take 15% and put it on your savings ladder.
Now, this is where the choices and decisions begin:
Here are some steps to guide your choices:
- Do you have a fully-funded emergency fund? If you don’t and are not close to having one, then put a large amount of your bonus towards this. The emergency fund is one of the most important assets for your financial health and emotional well-being. In addition, knowing that you have money set aside for emergencies can give you peace of mind that not many other things can. So make sure that you are putting in as much as you can, including all or most of your bonus to make sure your emergency fund is in place.
- Are you barely covering your bills? Is there an “envelope” that never seems to have enough? If bills are creeping up on you, consider placing a significant amount to help bulk up your bills “envelope” and help buffer some hard months. If you have very little money in one of your envelope accounts, then consider placing some money in there to bulk that up.
- Do you have a big event or purchase coming up? For example, I have a baby being born soon, so any and all bonus money is going towards the expenses associated with that. These types of “envelopes” are often called “sinking funds,” and they could often use some extra boosting so you don’t need to do a juggling act with your bills later on.
- Put the rest on your savings ladder. Whatever rung you are up to, maybe max out your retirement accounts before the end of the calendar year. Maybe your “Life Happens” fund is pretty underfunded. Maybe you have an investment account that you would like to top off.
- The best part-splurge! Even if you have to use your money for options 1-3, don’t forget to splurge on something for yourself! Even if it’s something really small, don’t forget to treat yourself! After all, someone thought you deserved it- that’s why you got a bonus in the first place! When you forget to treat yourself and give yourself a little breathing room, then you get burned out. You start to feel worn-down and discouraged, and that does not help anyone! So don’t forget to treat yourself to a little something for a job well done.