Few things in work life feel better than seeing a fat bonus check come our way. Seemingly a windfall, some people see it as an opportunity to take an exotic vacation, or get a new boat or a new car.
Others look at it as an opening to pay down debt, increase an investment position, or add padding to an emergency fund. Both ideas are equally valid, though one may make more sense than the other—depending upon your circumstances.
Ultimately, how to use a salary bonus will come down to your priorities.
Don’t Count on It
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Before we go any farther, it’s important to recognize salary bonuses aren’t guaranteed. You shouldn’t expect one each year just because you got one last year.
Conditions change, business goes up and down. Your management team might even decide to put the money to use someplace else one year.
Do not allow your financial goals or recreational plans to hinge upon getting a bonus check.
Consider Your Circumstances First
If you’re carrying debt from month to month, or you’re in the early stages of your career—or the late stages without a lot put away—your bonus check should not be looked upon as the trigger for a massive shopping spree.
It’s important to always pay yourself first.
However, paying yourself first does not mean spending money on something that will provide instant gratification—but ultimately leave you wanting. Paying yourself first means taking steps to ensure your financial future is always going to be secure.
If any of the above describes where you are, you’ll be far better off apportioning the bonus money between reducing your debt load, shoring up your emergency fund and investing in your retirement plan or another long tem financial goal.
Clarity Money’s manage money app is a good tool for planning this, as well as your household spending as a whole.
Cover Annual Expenditures
Another smart use of a salary bonus is paying for things that happen on an annual basis. If you have a membership that renews each year, or any other significant optional expenditure that happens every 12 months, applying your bonus check to it means it won’t take a bite out of your regular income when it comes around.
And, if you heeded our advice against depending on a bonus as part of your main revenue stream, you can forego the optional extra without having to sacrifice the rest of your budget.
If You Use it For Fun…
Now, with all of that said; if your money situation is well in hand and your retirement plans are on track, there’s nothing wrong with breaking a slice off for a good time. However, if you decide you’ll use your annual bonus that way, it’s a smart idea to predicate your activity solely upon the receipt of the bonus.
In other words, if you don’t get the bonus money, you don’t get the toy or the trip. This way, you won’t be tempted to raid your savings to make up for it if the bonus doesn’t come.
Budget Your Bonus
Once you know how much your bonus is going to be, come up with a plan for apportioning it. Taking the time to allocate it in advance will help you avoid falling in love with something that costs more than you’ll have to spend.
If you’re like most people, when this happens, you’ll sigh and dip into your household budget to make up the difference. Or, you’ll charge the difference and go into debt.
But should the way you use a salary bonus really make you go into debt? How is that cool?