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A year-end bonus can add a welcome lift to your holiday season, offering a financial boost in return for all your hard work throughout the year. For many employees, these bonuses aren’t just symbolic pats on the back. They can be meaningful additions to your income.
According to data from Northwestern Mutual, the average bonus came in at about 2.8% of total compensation. That means an employee earning $80,000 might receive roughly $2,240, while someone making $120,000 could see closer to $3,360. Whether your bonus is modest or substantial, that extra cash can make it easier to cover seasonal expenses like travel and holiday shopping.
But a bonus can do much more than help you get through December. Used wisely, it can fast-track your financial goals and still leave room for a little well-earned fun. Before you decide where that money goes, consider these four smart ways to put your year-end bonus to work.
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1. Pay down your debts
Consider putting your bonus to work by paying down any debt you may have. Paying off a high-interest credit card or personal loan offers an immediate return, and getting rid of that debt can be freeing and empowering.
It’s easy for even small balances to grow into something harder to manage. According to Forbes Advisor’s credit card APR database, the average interest rate as of November is 25.32%, which is a steep cost if you carry a balance from month to month.
If you carry a balance, the high interest rates mean that less of your payments are going toward the principal balance on your card, so it takes longer to pay off your credit card debt.
Using the lump sum of your year-end bonus to pay off or pay down debt offers a guaranteed return. When you pay off debt, you’ll enjoy reduced stress and can put your money toward other priorities, rather than paying off credit card or loan interest.
2. Fortify your emergency fund
It’s also a great idea to use some of your year-end bonus to strengthen or top off your emergency fund. An emergency fund is key in helping you navigate unexpected expenses without having to take out debt and pay interest.
According to a study conducted by Empower, one in three Americans don’t have an emergency fund. Additionally, the median emergency fund for Americans is just $500, which won’t go far when you consider the cost of emergencies like medical issues, vehicle breakdowns or even job loss.
It’s ideal to build up an emergency fund that covers three to six months of your living expenses. Adding your year-end bonus to your emergency savings can be a good way to quickly boost that fund, giving you greater peace of mind and security in case you face any unexpected events.
As you build up your emergency fund, consider putting those savings in a high-yield savings account. These accounts offer higher interest rates than traditional savings accounts, so your money can generate a bit of extra income for you.
Explore some of today’s top savings offers with the tool below, powered by Bankrate:
3. Max out or add to your 401(k) and other retirement savings
You can also use your year-end bonus to max out or add to your retirement contributions. Investing for retirement can help give you more confidence and assurance. If you haven’t done so already, consider consulting with a financial advisor to determine the best investment strategies for your age, your personal situation and your retirement goals.
If you’re considering putting some of your bonus toward retirement, don’t wait too long. Contributing before the end of the year might have tax advantages. For example, contributing toward a 401(k) or traditional IRA is usually a pre-tax contribution, which lowers your taxable income, so you’ll pay less in taxes.
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4. Have (a little) fun without guilt
You’ve worked hard for your year-end bonus, so don’t feel that you have to put all of it toward goals like paying off debt or boosting your emergency fund. You can absolutely set aside part of your bonus for some guilt-free fun spending.
You might want to designate part of your bonus as a “fun fund.” Take, say, 10% of your bonus and set it aside for enjoyable spending, whether that’s a dinner, trip or treat that aligns with your financial goals.
A little fun spending is important to a balanced approach to your overall money mindset. Financial wellness isn’t about deprivation, but is instead about strategic spending and saving. If you have put most of your bonus toward important financial priorities, be sure to reward yourself with something you enjoy.
Make your bonus work for you
A year-end bonus can do more than cover holiday expenses. When you use it with intention, it can strengthen your financial foundation, help you hit long-term goals and still leave room for something enjoyable. No matter the size of your bonus, putting it to work in smart ways now can create benefits that last well beyond the holiday season.