8 Wise Money Moves to Make With Your Bonus

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You just received a bonus at work, and the first word that comes to your mind is “splurge.”

But that can be a mistake. Although you are entitled to use the funds however you please, making the right moves can lessen financial burdens now and later on down the road.

If you earmark the money for savings or to pay down debt, make a plan and execute it promptly. That way, the funds won’t grow legs overnight and run away.

The longer the money sits, the more tempted you may be to waste it on meaningless purchases.

Here are some suggestions for putting a bonus to good use:

1. Tackle credit card debt

Paying down debt balances can save you money that otherwise is wasted on interest payments.

The debt snowball method — which suggests you tackle the smallest balance first to build momentum — is recommended by some experts. However, it makes better financial sense to tackle the debt with the highest interest rate first.

For more tips about quickly eradicating those credit card balances, read “7 Steps to Get Ruthless About Paying Off Your Debt.”

2. Get caught up on past-due bills

If you have bills that are past due, paying them down should be at the top of your priority list. Unpaid bills put you at risk for a slew of late fees and interest penalties.

Past-due bills also are likely to wreak havoc with your credit score if you do not pay them off.

3. Boost your emergency fund

You can also use the extra funds to beef up an emergency savings fund. That way, a layoff, medical emergency or other unexpected event or expense won’t quickly turn into a financial nightmare.

If this is your plan, shop around at financial institutions for savings accounts that offer a greater return on your money. And be sure to take a look at “9 Ways to Build an Emergency Fund When Money’s Tight.”

4. Beef up your nest egg or other investments

If you have not maxed out contributions to your 401(k), this may be the perfect opportunity to do so. You don’t want to miss out on free money in the form of matching contributions from your employer, or the tax breaks you get from your contributions.

Failing to build a nest egg today could very well mean that, someday, you will retire poor.

From our Solutions Center: Maximize your Social Security benefits

Another benefit of beefing up your nest egg is the beauty of compounding interest. It favors those who make smart investments early on.

If you’ve already maxed out retirement savings, invest the money in nonretirement accounts. If you are intimidated by the thought, seek out a fee-only financial adviser for guidance.

Money Talks News finance expert Stacy Johnson offers some tips on how to locate and select a reputable financial adviser.

5. Establish a college fund

Planning to incur higher education expenses for yourself or your children in the future? Prepare ahead of time by opening a 529 plan, which allows money to grow tax-deferred while you save for college.

In addition, withdrawals from a 529 plan are tax-free as long as they are used for university tuition or other qualifying expenses.

Before making the leap into a 529 plan, speak with a financial adviser to determine if other plans, such as the Coverdell education savings account, better suit your needs.

6. Home improvements

A bonus can be the source of repair funds for those who have a leaky faucet or an ancient air conditioning unit. Use the funds to take care of those problems now before they end up costing you more in the long run.

Check out “8 Home Improvement Projects That Pay Off Big.”

7. Be charitable

Donating your bonus funds to a good cause will warm your heart and could reduce your tax liability. To determine which contributions are tax-deductible, refer to IRS Publication 526, or use the IRS online eligibility tool.

8. Live a little

While it’s important to be smart with your money, it is also OK to live a little. So allocate a small percentage of your bonus to a slush fund and give yourself the proverbial pat on the back for all of your hard work.

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  • Kim

    Great advice, but I have never held a job that pays bonuses.

  • grandmaguest

    All excellent ideas!
    As a side note I would add, consider putting the funds into a Roth IRA (or some other type of Roth depending on your situation), and think about adding to it as often as you can. You can even bookmark it as an education fund. After 5 years you could, if needed, pull the principle (and possibly all with out tax penalty I believe) to help fund college for yourself or children. And should your children forgo college, you have a nice nest egg for your retirement. Make sure you check out the taxes on this but I do believe you are allowed to use this money for college or even (if I remember correctly) for a down payment on a house. Again, though, it has to set for at least 5 years, but if you start this when your kids are babies or before they are born(?) wouldn’t that be a nice little nest egg. Of course, I would also suggest you do a study on this first, and of course make sure your 401 or other retirement accounts are funded as well. For some this might work better and give you more control of the funds and their use than a 529.

    • http://ecofrugality.blogspot.com/ Amy Livingston

      Query: why a Roth and not a traditional IRA? As I understand it, the difference is that money in a Roth is taxed when you deposit it, while money in an IRA is not taxed until you withdraw it. So, since I expect to be in a lower tax bracket after retirement than I am now, why would it be to my advantage to choose a Roth IRA?

  • Sandra Murphey

    As an EBay seller, extra funds would come in handy to make some wise buys on discounted or thrift store or garage sale finds, or get free stuff on Freecycle and post on EBay or Craigslist. It’s easy to find out what the best sellers are on EBay. Using money to make money can be a smart move, especially if there’s not a lot of risk involved. Start small, and see how you do. Learn as you go without a big investment. Put aside some of your profits, so you have a stash for future times of opportunity or unexpected losses, or increased expenses.