When you are working, a bonus is one thing that employees always wait for! It is that month of the year when appraisals are announced, and rewards are offered, but landing one is not a sure thing. And landing one can be a great thing.

Some times, knowing what to do with your year-end bonus can be some trouble. Should you get a new bag? Or should you take a short trip? So maybe start saving, investing, or getting that emergency fund sorted? Depending on your situation, it is advised that you decide how smart you would spend your bonus.

Today, employers are increasingly relying on productive performance-based salaries (additional compensation offered for high and effective performance). This kind of reward is often provided if salary increases. And this is the time to figure out what to do with your year-end bonus too. 

When you are rewarded with the bonus, it is best to come up with some steps to follow, which will help you live better by spending smarter. Here are some tips we recommend:

  • Plan
  • Pay off debts
  • Save
  • Spend

Each of the steps is important and connected in a way! 

Step 1: Plan

It is advised to divide and segregate your bonus into three categories: pay off debt, save and spend. If you have heard of the 50/30/20 budget rule, you will understand how much you want to allocate to each of the categories as per priority.  For example, you can allocate 50% to paying off debt, 30% to a short-term and long-term savings goal, and 20% to vacation expenses. 

Step 2: Paying Off Debts

You can use a decent amount of your bonus to pay off your debts, too, especially if the debts have a high-interest rate, and you are ending up paying more. This way, it will also help you save more money towards the short-term as well as long-term goals. Paying off debts such as EMIs, credit cards, etc., you will be able to start the new year debt-free. If you are on a home loan or a car loan, it is a great idea to keep some money aside to pay these off, as you will pay less interest over the years. 

Step 3: Save

It is always recommended that you save some portion of your bonus in your savings account. You can also give a name to the plan accordingly to know and remember what you are saving for. For example, a car deposit, holiday trips, emergency funds, long-term funds, and so on. You must budget your finances wisely when it comes to saving VS spending. 

Step 4: Spend

You have worked hard the entire year, and it is undoubtedly time to play harder. So, spend some of your bonus on rewarding yourself, such as buy the gadget you always wanted, or take that pending trip you desired. There is still room for fun once you have planned your budget wisely. However, it is best to choose something worthwhile that will add value to your life than just to spend blindly. You can also consider using some money in making home improvements, like painting the walls, fixing the roof, and other renovation options, or even cover some upcoming expenses. 

What percentage of your bonus should you save?

While the bonus lasts for the time, if you are not careful, your bonus can disappear without you even knowing it. Hence, you must make a plan on how you want to spend your bonus. After all, as you earn more, you tend to spend more – and that is called lifestyle inflation. While it is okay to treat yourself and spend some portion of it, you don’t want to get into the habit of merely blowing all the funds. Thus, the above plan will help you in dealing with how you can save and spend your bonuses while also letting you have some fun. And while you do that. Here are eight ideas we suggest on how and where you can use your bonus money.

Getting most from your year-end bonus

  • Treat yourself reasonably

Go on. Indulge, but it is essential to do something you enjoy out of your achievements. The most crucial thing to do is to set limits – otherwise, it may take a toll on your finances. Spending wisely can help you save up more than you expect. So, budget your bonus and go ahead, rewarding yourself with things you love for some short-term gratification. Keep the rest of your bonus money aside for good long-term use.

  • Check-in your emergency fund

Once you have made a budget plan, you should stick to it. It is also ideal for checking in and contribute to some unexpected expenses – such as if you have not built an emergency fund. You can use some of your budgets to make sure that you are covered. By saving, it will save you from unexpected expenses such as job loss, car trouble, etc. This can keep you at ease and get you well prepared for anything that requires urgent attention.

  • Invest in learning a new skill

If you have always wanted to learn that skill, this is the right time. An expertise that you probably require for your job? Using your bonus to learn the craft is a great way to invest in yourself and your future. Investing in yourself can improve your earning potential and get you a better job later too. Not just a great source of learning, but is also a source of life satisfaction. If you want to pursue some of your hobbies such as learn a musical instrument, develop some programming skills, the year-end bonus could help. If you do not find value in these activities,  you can save your money too.

  • Contribute towards your retirement

If you have not contributed or started saving for retirement as yet, this could be the right way to invest your tax-deductible contributions for retirement. Effectively investing with your money can have significant benefits and help boost your retirement savings too. Paying off your debts is the first step, and the second step is to consider how much you can save for your retirement accounts.

  • Save for your dream vacation

Paris? Madrid? Canada? Have you always wanted to take the trip of your dreams? You could use your bonus to save up for your next vacation as well. It is advised that you keep aside some money while you have it than to pay for the vacation later if you are taking a travel loan, and beat the stress.

Bonuses are a tremendous year-end treat, and while you choose to decide what you want to do with your bonus, remember to do something meaningful. It makes a lot of sense to use extra money in saving, investing and improving your future. This way, it not only keeps your finances intact but also reduced stress around your finances and makes you feel good about spending your money is the right place. 

Aahna Gandhi

Aahna Gandhi is an enthusiast traveller, writer and a PR Professional. She likes sharing memorable moments from her travels and inspire others to live a life full of wonder. Known for her content, she has worked for travel, technology, lifestyle, health sectors as well as finance.

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