The end of the year is quickly approaching and you might be receiving a year-end bonus pretty soon! Getting a year-end bonus or referral of any type from work is super exciting. If you are like me, your initial reaction is “wooohoo I can buy things!”
The truth is, yes you should reward yourself for all your hard work but there are a lot of smart money moves you can make with that bonus money.
Here are five things you should do when you get bonus money:
1) Transfer Money to Your Emergency Fund
According to a recent GoBankingRates survey, more than 50% of Americans have less than $1,000 saved.
You should have at least $1,000 set aside in case of an emergency but I recommend having 3-6 months of expenses saved. It is important to remember it is 3-6 months of expenses not 3-6 months of your income.
If you do not have an emergency fund yet, this is the perfect opportunity to get one started.
Remember, your emergency fund is for actual emergencies. This could be a medical emergency, job loss, or home/car repairs. If your emergency fund is already fully funded that is great.
That means you have more money to put toward one of the other 4 money moves.
2) Start a Sinking Fund
If you already have your emergency fund, or you have some important milestones or big purchases in the near future, I recommend putting some of your bonus money into sinking funds.
A sinking fund is a fund specifically for a specific event or goal.
Some sinking fund examples are:
You can contribute to multiple sinking funds or pick one that is most important to you.
Two of the sinking funds I currently have are for my wedding and for a down payment on a house. When I received my annual bonus last year I put 30% of my bonus straight into my wedding fund.
The key is to transfer the money out of your checking account as soon as you get it. The longer you leave it in your checking account, the more likely you are to spend it on something you don’t need.
3) Make an Extra Loan/Debt Payment
If you have student loans, car loans, or credit card debt, a bonus is a great way to make extra payments and pay off your debt faster.
I recommend paying off your most expensive debt first. This would be your debt with the highest interest.
I received a referral bonus this year and was able to pay off the rest of my car loan. It was an amazing feeling (and now I am debt free!).
You might want to use 40-50% of your bonus to pay off debt if you have a lot of loans or consumer debt. Think of how much money you will save in payments and interest when your debt is gone.
If you are struggling to pay off your student loan debt we recommend checking out LendEDU. They are the only refinance company we trust on our site. Learn how you can refinance your student loans and save thousands.
4) Increase Your Retirement Contributions
If you are not taking advantage of your employer’s 401k retirement account and any company match I highly recommend doing that.
If you are already contributing to a 401k or Roth IRA, use some of this money to increase your retirement contributions.
Your employer might already put a percentage in your 401k if your bonus goes through payroll so make sure you check your paystub.
If you do not have a Roth IRA this is a great time to open one. One of the many perks of a Roth IRA is your money grows tax-free. You fund your Roth IRA with after-tax dollars so you have already paid taxes.
Related: Why Millennials Need to Start Saving for Retirement
5) Set Aside Some Fun Money
You earned this bonus after a year of hard work. You should reward yourself by spending a little bit of your bonus on something you have been eyeing.
Whether that is a new dress, going out to eat with your friends or a yoga class, make sure you set aside some fun money. This will keep you from splurging later on and ruining your budget or financial goals.
Even during your debt payoff or journey to financial freedom, you need to make sure you reward yourself.
If you know you will get a year-end bonus and you know what the estimated amount is, I recommend deciding what you will do with it before you get it.
This way you are less likely to just splurge and buy that new TV you are eyeing. If you do not know the amount of the bonus, you can still decide what percent of the bonus you want to save, invest, pay off debt, spend.
For example, you might put 40% toward debt, 30% toward a sinking fund, 20% toward retirement, and 10% towards fun money.
As tempting as it might be to spend your entire bonus, just remember this bonus can really help jump start your journey to financial freedom.
This guest post was written by Alli Rosenblum is a personal finance and lifestyle blogger at financiALLIfocused.com.