Good news for employees: Even though 2020 and 2021 have been distinctly different from years past, full of economic strife due to the global pandemic, more employers are opting to give year-end bonuses. So if you’re one of the fortunate workers who’s receiving one, you can rest a little easier knowing there’s more money going into your bank account.
No matter if your end-of-year bonus is $200 or $20,000, you don’t want to squander it — especially in these uncertain times.
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 managing director 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.
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’re 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, North Carolina.
“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
Look at your bonus as an opportunity to make some sort of financial progress — an opportunity you can’t afford to waste,” said Greg Klingler, Director of Wealth Management at the Government Employees’ Benefit Association. “Don’t use it toward everyday expenses, like clothes, groceries, etc., as these should already have a separate budget.”
Putting the money into a savings account is one way to keep yourself from the temptation of spending the bonus, but earmark it for a purpose, as Klingler suggests. “If you’re going to leave it sitting in your savings account, at least put it toward your emergency/rainy day fund,” Klingler said.
When deciding on a savings account, choose a high-interest one to grow your savings faster.
Best: Save It in a Tax-Free Investment Account
If you’re already saving enough in your 401(k) 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.
“Tax-free investment accounts provide you with a low-risk way to set money aside,” said Jake Hill, CEO of DebtHammer. “You can turn whatever you’re tucking away into something more without having to deal with the stock market or anything else that might prove too risky. A tax-free account gives you a very clear before and after, and I’ve found when people can visualize how their savings will look in five, 10, 20 years, they’re more likely to do it.”
Worst: Let It Sit in a Low-Interest Account
“While a low-interest account is fine for small amounts of money as you’re getting established, I wouldn’t recommend it for a sudden influx of cash,” said Hill. “This will include most free savings accounts offered by banks. You will make some money over time, but it will literally be cents at a time.”
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% but tops out at 15% for most taxpayers. Although you get an upfront tax benefit by contributing to a 401(k) or traditional IRA, the money you withdraw in retirement will be taxed at your regular income-tax rate, which can be as high as 37% 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.
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 or NAPFA, 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: Put a Down Payment on a Big-Ticket Item
Your year-end bonus might seem perfect for putting a down payment toward a big-ticket item you’ve had your eye on. Although the bonus can help you make a down payment, it’s usually not a wise use of your money.
“Thinking of your bonus as a down payment can set you up for monthly payments you really can’t afford,” said Klingler. “These items are things like cars, big TVs, boats, etc. — indulgences for which an influx of extra cash shouldn’t be a tipping point to pull the trigger on purchasing.”
However, there is one instance when putting a down payment on a big-ticket item could be a good idea. “Buying a new car can actually make sense depending on the maintenance you’re putting into your current vehicle,” said Alex Miller, founder and CEO of UpgradedPoints. “If this maintenance consumes a large portion of your budget — or a large amount of your time — it may be worth looking at purchasing a new car.”
Best: Donate Your Bonus
If you itemize on your tax return, your eligible donations are tax deductible. And through Dec. 31, people who take the standard deduction are allowed up to a $300 deduction on their 2021 tax return for qualifying charitable donations made during the year.
“People getting bonuses are still employed and likely not the people having hardships,” said Beth Logan, EA with Kozlog Tax Advisers. “Many are likely to be getting some economic stimulus money. Therefore, I recommend that people without hardship should donate some of their bonus or stimulus.”
Worst: Gamble It
While the thought of taking your pile of bonus money to Vegas to try your luck might be tempting, it’s not a smart move.
If you do use your bonus to gamble and attempt to hit the jackpot, you must report your winnings on your tax return. 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, which equals wasting your year-end bonus on a whim. Instead, take the advice of Roy Ferman, founder and CEO of Seek Capital: “Using a holiday bonus to invest in yourself in ways like education, entrepreneurship, retirement, etc. is like a student using a scholarship to pay for school fees,” said Ferman.
“It should be a matter of fact to use free money in the best way possible, that is using it to get you a leg up financially or professionally. There is no use in squandering your bonus. Holiday bonuses shouldn’t be treated like a regular paycheck but instead something like buried treasure that needs to be properly allocated on assets — not clothes and takeout.”
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Cameron Huddleston contributed to the reporting for this article.