Sitting on a Year-End Bonus? Here's How to Make the Most of It

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It's time to put that extra cash to good use.

It's time to put that extra cash to good use. 

Not everyone is fortunate enough to get a bonus from work. But if you're employed by a company that gives out year-end bonuses, there's a good chance you're sitting on a nice pile of cash right about now. 

The question is: What should you do with it? You could put it toward the European vacation you've been planning in your head all year, or upgrade your electronics. But before you make plans to spend that money on these and other luxuries, consider the following smart financial choices instead.

1. Build or boost your emergency savings

No matter what your income looks like, you should have an emergency fund with enough money to cover three to six months of living expenses. Without that safety net, you may have no choice but to rack up debt the next time you're hit with a home repair, car problem, or bout of unemployment. If your emergency fund needs a boost -- or a start -- then you shouldn't even think about spending a dollar of your bonus until you've got enough to pay for three months of essential bills in your savings account.

2. Pay down credit card debt

If you're carrying a credit card balance, whether from the holidays or before, the longer it takes you to pay it off, the more money you'll throw away on interest. And, carrying lots of credit card debt could also hurt your credit score. If you've gotten a bonus, it's wise to use it to pay down your debt. And if you're not sure where to start -- say, because you owe money on more than one card -- see what interest rates are attached to your different balances, and pay off the cards with the highest rates first. Or, transfer your balances onto a single card with a lower interest rate and pay off that single card. 

3. Start saving for retirement

Building an emergency fund should trump retirement savings. But if you're all set with the former, then it pays to start focusing on the latter. Imagine your year-end bonus leaves you with $1,000 to play with. If you were to put that entire sum into an IRA or 401(k), invest it at an average annual 7% return (which is doable when you load up on stocks), and leave it alone for 40 years, you'd grow it into about $15,000.

4. Invest in yourself

Maybe you've been meaning to go back to school, or take specific courses to further your career. If a lack of money has been holding you back, now's the chance to move forward. By investing in your professional success, you could help yourself earn more money (and higher bonuses) over time. And if you have a side hustle that earns you a decent chunk of cash, investing in new tools or equipment for it could help you boost your near-term earnings. The same holds true if you sink a little money into self-marketing. 

Resisting the urge to spend your bonus on fun things takes willpower, and lots of it. But if you do wind up using that money responsibly, you'll be much happier for it in the long run. 

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