Making the Most of a Financial Windfall

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Whether it’s tied to performance, holiday profits or a tax refund, nothing beats the joy of receiving a bonus. But resist the temptation to blow it all on something that could be short-lived. Instead, consider the following, all of which can have a lasting impact.

  • Pay down debt. If you’re carrying a credit card balance or another high-interest, short-term debt, here’s a chance to reduce it. With average credit card debt at nearly $8,000 per household, even a modest holiday bonus can make a serious dent and minimize the snowball effect.
  • Refresh your emergency fund. Are you one of the 63 percent of Americans who doesn’t have the savings to cover an unexpected $500 expense? Consider building a cash cushion that will help prevent you from reaching for your credit card at the next emergency.
  • Superfund your retirement savings. Take this opportunity to max out your IRA or 401(k). Using a bonus to put more long-term money into tax-advantaged accounts lets you avoid the end-of-year funding rush.
  • Leap ahead a few payments. Overpaying your usual mortgage amount means you’re shaving down the principal faster, which results in less interest. You can do the same with student loans and other long-term payments, just make sure there isn’t a prepayment penalty.
  • Don’t just treat yourself; invest in yourself. Reserve 10 to 20 percent of your bonus for a home, health or education upgrade. Spending in areas that are likely to generate more money in the future is a smart way to rationalize a purchase since you’re putting the unexpected funds to good use.

Consider dividing your bonus among multiple categories, giving higher percentages to your more urgent priorities. Using this strategy for a lump-sum windfall can turbocharge your existing short-term and long-term financial goals while still giving you a little breathing room to enjoy your reward.

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