7 Smart Ways to Spend Your Year-End Bonus

Is a year-end bonus in your future? According to recent career research, 33 percent of companies in the United States offer bonuses.

While that bonus might be a welcome boost after holiday expenses, you may also be wondering if there’s more you could be doing with your windfall — especially given today’s economic uncertainty as inflation nudges prices higher, interest rates rise, job cuts make headlines and there are whispers about a potential recession. Here are smart ways to use your year-end bonus in a way that will help you start 2023 off on more balanced footing.

1. Splurge a little

Yes, you could spend your entire bonus on financial goals, but you should also enjoy yourself today. Your hard work deserves a reward. So if you’re feeling as though the time is right to splash out, take a portion of your bonus off the top and spend it on something you want now. And while it seems counterintuitive, spending some of your bonus today might also save you in the long run. Think of it like your diet: If you limit yourself to eating kale, you could be tempted to go overboard on an ice cream binge. The same principle applies to a budget that’s too austere.

2. Pay off credit card debt

As interest rates jump, credit card debt becomes even more costly. According to a November 2022 report from the Federal Reserve Bank of New York, credit card balances are surging, and currently sit at a 15 percent year-over-year increase, the largest in more than 20 years.

If making progress on paying down your debt is one of your goals, applying your bonus to pay off your balance can save big bucks in the form of future interest payments. If you aren’t sure about the best strategy, here are some tips for how to pay off your lingering debts.

3. Build your emergency fund

A recent survey finds that fewer than half of Americans are comfortable with their current emergency fund. But if you don’t have an adequate emergency fund, you’ll probably find yourself right back in credit card debt the next time your car needs a big repair or you’re faced with a vet bill. It’s generally a good idea to have around six months of expenses stashed away in a safe place like a savings account. If you’re not quite there yet, consider using some of your bonus to bolster your emergency fund.

Of course, if you are trying to pay off debt, you might want to take some time to determine if you should pay off debt or build your emergency fund first.

4. Save for future goals

Saving for retirement or your kids’ college may seem eons away. But having so much time is exactly why you should save now. That’s because compound interest can allow you to earn exponentially more on your savings when you have more time to let it grow. For a fun peek into the future, check out this handy calculator to see what your bonus could be worth if you let compound interest work for you. If you’re not sure if you can save for both your retirement and your kids’ college costs, you should prioritize your retirement — after all, you can borrow for education, but not for your golden years.

5. Do some good

It turns out that money can buy happiness. Studies have found that people who spent their annual bonuses on others or donated them to charity were happier than those who spent it on themselves. The end of the year is a great time to allocate some or all of your bonus to a cause that’s important to you — you could possibly reap a tax deduction, too. Before you part with your funds, do a little research on the organization to make sure it’s legit, and then give with a happy heart, knowing that you’re making a difference to an important cause.

6. Save for a meaningful goal

Whether you’re trying to save up for a down payment for a house or want to convert your dated kitchen into an entertainer’s dream, saving for a near-term project can be motivating. Designating your bonus for a specific purpose can give your fund a jump start and inspire you to set aside a little from each paycheck so you can reach your goal faster. 

7. Plan a vacation — instead of a shopping spree

Sure, buying a pair of fancy shoes or a big-screen TV might make you happy today. But before you spend your fun money on material goods, consider that many people derive more happiness from spending money on experiences than things — especially given all the adventures we’ve missed out on over the past few years. A vacation is a great way to make memories with friends or family as you relax and recharge; plus, the anticipation can be a big part of the fun. Replace your screensaver with a photo of your dream destination to remind you why you work so hard each day — and vow to stay on track to nab that bonus again next year.