Good news for employees: More employers plan to give bonuses this year. Seventy-five percent of human resources and hiring managers said their company plans to give holiday bonuses this year, up from 67 percent in 2015, found a survey by staffing firm Accounting Principals. The amount companies plan to give is higher this year, too — $1,081 compared with an average $858 in 2015.
Here are five ways you should — and shouldn’t — spend your bonus this year to ensure you get the most out of your money.
Best: Invest in Yourself
Investing in yourself is a smart way to spend your year-end bonus. Use the cash to create money-making opportunities down the road and build your wealth.
“Maybe there’s an online course you have been wanting to take or a professional group you have been wanting to join,” said Taylor Schulte, CEO of Define Financial in San Diego. “If money has held you back from jumping on these opportunities in the past, consider using a bonus to invest in something that could pay dividends forever. All it takes is learning one new skill or meeting one new person to create a compounding effect that far outweighs adding a few extra dollars to your retirement fund.”
Check with a local university or community college to see if it offers any continuing education courses that will provide you with skills to help advance your career. Search for professional organizations you can join or conferences in your field — or a field you’re interested in — that you can attend.
Or, use the money to start your own company. Your bonus could help you pay the fee to form a limited liability company, or LLC, create a business plan and build out a marketing strategy for your business, said Brandon Hayes, a certified financial planner and vice president of oXYGen Financial in Atlanta.
“Working for yourself can be very rewarding as you create wealth and opportunities for yourself and those around you,” he said.
Also Read: Why You Need to Pay Yourself First
Worst: Splurge on a New Wardrobe
You might see your bonus as a way to upgrade your wardrobe with some designer threads or shoes. As the saying goes, the clothes make the man — or woman. So, this sort of splurge could be justified, right?
“Unless you are buying a well-needed suit outfit for a job interview, I’m not an advocate for buying new shoes and clothing,” said Hayes. “Americans seem to think more is better, and this area is no different. Keep your wardrobe simple, and don’t give in to the urge to buy the latest sneaker or trendy pair of jeans.”
If you want to look better, consider spending the money on a gym membership and personal trainer. Not only will you improve your appearance, but your health could benefit — and being healthy can save you money.
Best: Spend It on an Experience
If you meet your savings goals, and you don’t have high-interest debt to pay off, consider using your bonus to pay for a fun excursion with your spouse, family or friends, recommends Chad Smith, a certified financial planner with Financial Symmetry in Raleigh, N.C.
“Research from the book ‘Happy Money’ showed incredible happiness returns from spending on memorable experiences,” he said. You’ll create memories that you can talk about for years and create more lasting enjoyment than you’d get with a material purchase.
Plus, using cash to pay for a vacation is a better option than racking up credit card debt to cover the cost of a getaway. It could take you months to pay off what you owe, and those monthly bills might make you regret your trip.
Worst: Use It as Normal Cash
Jamie Pomeroy, a Minnesota financial advisor said one of the worst things you can do with a bonus is, well, nothing. If you don’t have a plan, she said, you’ll “just consume it on meaningless things this holiday season.”
Instead, adjust your budget to account for the extra cash. “Decide in advance what you want to do with the funds,” said Charles Scott, an Arizona financial planner, co-creator of FinancialChoicesMatter.com and founder of Pelleton Capital Management. “Of course, it helps to stick to the plan after the funds arrive.”
The first thing you should do, Scott explained, is move the money from your checking account to a savings account. “Park it there, and then implement your plan,” he said. “This avoids the temptation of debit card usage mysteriously making the bonus disappear.”
When deciding on a savings account, choose a high-interest one. That way, the interest you earn can grow your savings faster.
Best: Save It in a Tax-Free Investment Account
If you’re already saving enough in your 401k to get the full matching contribution offered by your employer — or if your employer doesn’t offer a workplace retirement account — use your bonus to fund a Roth IRA.
“Starting or depositing more to a Roth IRA is generally a slam dunk if eligible because it builds tax-free savings plus all the following years of compounding growth,” said Smith.
The ability to withdraw money tax-free in retirement is one of several reasons to have a Roth IRA. The maximum you can contribute to a Roth IRA in 2016 and 2017 is $5,500, or $6,500 if you’re 50 or older. You have until your federal tax return is due to make contributions for the previous year. However, your income must fall below certain levels to contribute to a Roth IRA. You can open an account at an investment firm.
Related: 5 Reasons You Need a Roth IRA
Worst: Let It Sit in a Low-Interest Account
Although Scott recommended getting your bonus out of your checking account and into savings, you don’t want to leave the cash sitting in a low-interest account if you already have three to six months of expenses saved up.
“Bank account interest rates are so low, you’re better off exploring options that could have better long-term returns,” said Smith. In addition to opening a Roth IRA, use your bonus to open a brokerage account and invest in stocks, bonds or mutual funds that will likely offer you a better yield than a savings account.
Plus, there’s a tax benefit to investing through a brokerage account. If you hold those investments for more than a year, they’ll be taxed at the long-term capital gains rate, which ranges from 0 to 20 percent but tops out at 15 percent for most taxpayers. Although you get an upfront tax benefit by contributing to a 401k or traditional IRA, the money you withdraw in retirement will be taxed at your regular income-tax rate, which can be as high as 39.6 percent for the wealthiest taxpayers.
Best: Invest in a Financial Planner
A year-end bonus could provide the funds you need to pay for professional financial advice.
“What better way to spend your bonus than to assure you and your family are taking the proper steps to reach your financial goals?” asked Hayes. “Involving a third party who can provide professional guidance during your working years can be a smart move.”
A CFP can help you create a financial plan. If you need someone to do a one-time review of your finances to ensure you’re on the right track, look for a planner who charges by the hour — such as a member of the Garrett Planning Network. If you want someone to guide you for years, consider a planner who charges a fee based on a percentage of your assets rather than an hourly rate. Find planners through GuideVine.com or NAPFA.org, the website for the National Association of Personal Financial Advisors.
Meet with a few financial planners to determine which one is right for you, and see if they have a clean record by searching the SEC’s website, which contains information about business operations. You also can check records through the Financial Industry Regulatory Authority’s BrokerCheck.
Worst: Buy a Car
Your year-end bonus might seem like your ticket to buying a new car. Although it can help you make a down payment, ask yourself whether you can afford to pay monthly loan payments going forward.
“Thinking you can afford a car payment just because you have more cash than normal is the wrong way to think,” said Hayes. “Make sure to start back with your monthly spending plan to assure your payment fits into your cash flow scenario.”
Best: Donate Your Bonus
One of the best things you can do with a bonus this year is give it away, said Pomeroy. You’ll help others in need and lower your tax bill in the process. That’s because you can claim a tax deduction on your donation.
If you’re not sure which organization you want to give to, consider opening a donor-advised fund. You can invest money in one of these funds and receive an immediate tax benefit, said Pomeroy. Then, choose the organization that receives your donation at a later time.
Worst: Gamble It
“Sometimes when people receive an unexpected lump sum of money, they have a burning desire to try and turn it into even more money,” said Schulte. “Since they didn’t plan on having it in the first place, it’s easier to justify throwing it on red at the local casino or investing all of it in a trendy growth stock.”
If you do use your bonus to gamble and attempt to hit the jackpot, you must report your winnings on your tax return. In fact, if you don’t the casino could withhold taxes from your payment. So, you’ll be paying taxes on your bonus twice — when you receive it from your employer and if you win money using it to gamble.
However, the bigger risk is losing all of the money. Don’t gamble away the bonus you worked hard to earn, said Schulte. “Treat that money just like every other paycheck, and make a smart decision to put yourself in a better financial position.”
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