5 Powerful Ways To Use Your Year-End Bonus
Written by
John Schmoll
Edited by
Rebekah Evans
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There’s nothing like that feeling of receiving a year-end bonus. For many people, it’s money they weren’t planning on, so there’s a world of possibilities of what they can do with the cash. American firms gave out relatively generous bonuses in 2024, with the average being $2,503, according to Gusto.
The amount represented a 2% increase from the average 2023 year-end bonus. Regardless of the amount, a year-end bonus can be a powerful tool to improve your finances. Consider using one of these impactful ways to bolster your financial situation.
Eliminate High-Interest Debt
Excessive credit card debt can be suffocating on any budget. Unfortunately, too many Americans struggle with debt, with total balances sitting at $1.23 trillion, according to the Federal Reserve Bank of New York.
Using part of your bonus to reduce high-interest debt is a good way to improve your finances. “This is the single most powerful step you can take with your money to strengthen your financial foundation. Given current credit card interest rates (averaging close to 22%), you won’t find a better investment,” said Austin Kilgore, analyst with the Achieve Center for Consumer Insights. You don’t necessarily need to use your entire bonus on debt, but any you do use can free up resources for other needs.
Help Your Taxes
If you don’t have debt, using your year-end bonus to help yourself out with taxes can be a fantastic use of the funds. Saving for your future is one of the wisest things you can do for your future self. This can come in the form of retirement savings or stashing money away for future healthcare costs.
Depending on your needs, you can take the tax benefit now or defer it to the future. “A year-end bonus can be used to fund a Traditional IRA, Roth IRA or Health Savings Account (HSA) — if the plan allows — all these accounts provide tax efficiency in their own way,” said Curt Scott, president and investment advisor representative at Scott Financial Group. Traditional IRA contributions reduce taxable income in the current year and Roth withdrawals are tax-free at retirement; HSAs offer triple tax advantages.
Open a High-Yield Savings Account
If you don’t immediately know what to do with your bonus, opening a high-yield savings account is a meaningful way to use the money. Don’t put the funds at your local bank, though, as interest rates often pale in comparison to those of high-yield accounts at an online bank.
Scott advised having a goal with these savings, though. “Opening a separate account, specifically designated for the goal in question and moving the bonus there, is a great way to keep the money from being spent on something other than the identified goal,” Scott added. If you don’t have a specific goal, using these funds to grow your emergency fund is prudent.
Invest In Your Home
If you’re out of debt, have made significant contributions to your retirement accounts and have ample savings, consider investing the bonus in your home. Houses are the largest purchase for most Americans, so why not use the money to upgrade something in your home?
“Invest in your home if you’re a homeowner and need repairs/maintenance on your home. Capital improvements also can sometimes create additional equity,” Kilgore said. If the funds aren’t quite sufficient for the desired upgrade, stash the money in a high-yield savings account until you can achieve the necessary amount.
Treat Yourself
There’s nothing wrong with using part of a bonus to splurge on yourself. Life is short and allocating some funds to pamper yourself can give you the momentum to continue with other financial responsibilities.
Set aside a portion of the cash without overdoing it. If you’re not sure yet what you really want, that’s OK. Give yourself the time to identify something you want that’s reasonable and fun.
Receiving a year-end bonus can be exciting. Take the time to assess your needs to help you identify the most powerful ways to use the money.
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