For many folks, December is a time to reconnect with loved ones, celebrate the spirit of the holidays, and reap the benefits of having a little extra cash. That's because the end of the year is often when companies will give out bonuses, and if yours is a sizable one, that's all the more reason to celebrate. But before you go out and blow that extra cash on something fancy but frivolous, consider these smarter ways to put that money to good use.
1. Pad your emergency fund
We're told time and time again that we need a minimum of three months' worth of living expenses in the bank to be truly protected from financial emergencies. Yet the majority of Americans don't have anywhere near that amount. It's estimated that 57% of working adults have under $1,000 in savings, while 39% have no savings at all. If you fall into either category, then you'd be wise to use your bonus to top off whatever sum you currently have socked away, whether it's a few hundred dollars or a few thousand.
Remember, without a solid emergency fund, you could end up deep in debt the moment you lose your job, fall ill, or get hit with a sizable expense you're in no position to pay for. Boosting your safety net is a good way to buy yourself some much-deserved peace of mind, so invest in that rather than a needless gadget.
2. Start building your nest egg
It's estimated that roughly one-third of Americans have yet to start saving for retirement. Now if you're, say, a year or two out of college, that's not such a terrible thing, but if you're older and don't have a nest egg, you risk losing out on key long-term growth on your money. That's why it's important to funnel any extra cash you get your hands on into your IRA or 401(k), assuming your emergency fund is already in good shape.
How much of an impact might a single retirement plan contribution have? Let's say your bonus gives you $2,000 after taxes in one lump sum. If you stick it in an IRA or 401(k), choose investments that will generate an average annual 7% return, and leave it alone for 30 years, by the time you're ready to retire, you'll have over $15,000. Now that alone isn't enough to retire on, but if you get $2,000 in bonus cash every year for 30 years, invest it, and average that same return, you'll be sitting on $189,000 in time for retirement. And that paints a much more favorable picture.
3. Pay down debt
The average American household with a credit card balance owes somewhere in the ballpark of $15,000, while the average student loan borrower aged 20 to 30 is on the hook for a $350 monthly payment. If you're sitting on any amount of debt, you probably know that the sooner you start paying it off, the less money you'll end up losing to interest. So if a bonus lands in your lap this year, it pays to use it to eliminate some of the debt you have.
Furthermore, if you're planning to buy a home or finance a car in the coming year, you should know that paying off a chunk of your debt could actually cause your credit score to climb. And that, in turn, increases your chances of not just getting approved, but snagging the best interest rates out there.
4. Invest in your career
It may be tempting to use your bonus cash on clothing or a nice vacation, but here's a better idea: Why not take that money and invest in yourself? Whether you take a course to build your skills or pay for a professional certification, using that cash to better your career will not only buy you more job security, but increase your chances of getting another bonus come this time next year. Talk about a win-win.
No matter what you choose to do with this year's bonus, don't just spend it all on a whim. Rather, take the time to really think about how that money will best serve you. Also, remember that none of the suggestions above require an all-or-nothing commitment. You might choose to put, say, 90% of your bonus into savings, and spend the remaining 10% on something you've been eyeing. And there's certainly nothing wrong with that.