Are you hoping for a year-end bonus? If so, you’re probably imagining all the ways you could spend that windfall.
The average bonus was $2,447 in December 2023, according to payroll company Gusto. This is a considerable change, which could put you in a better financial position in 2025 with proper planning.
If you’re expecting a bonus to hit your account soon, it can be tempting to splurge. And that’s perfectly fine. After all, you deserve a reward after working hard all year.
However, before you make an impulse purchase, consider some ways you could use those funds to improve your financial situation.
In today’s high interest rate environment, it is expensive to go into debt. And the higher the interest rates you pay, the faster your debt balance can grow.
So, consider using your year-end bonus to pay off some of your debt. This not only pays off your balance faster, but also saves you money on interest over time.
For example, let’s say you have $3,000 in credit card debt with an annual interest rate of 21%. If you took 12 months to pay off that debt, you’d pay $279 per month and spend about $352 in interest (assuming you don’t make any new purchases with the card).
Now let’s say you receive a $2,000 bonus and use it to pay off your credit card balance to $1,000. In this case, you would only need to pay $93 per month to eliminate your balance in one year. And you would pay only $117 in interest, a savings of $235.
Read more: What is more important: saving money or paying debt?
If you’re not sure what to do with your bonus money, you shouldn’t feel pressured to use it right away. You can save it in a bank account while you decide. However, if your money is going to stay in the bank, it should at least earn interest and help it grow without any work on your part.
Following recent rate cuts from the Federal Reserve, deposit account rates are falling. Still, there are many high-yield savings accounts, money market accounts, and certificates of deposit (CDs) that pay upwards of 4% APY (or even more). Take some time to compare current account rates and options and put your bonus in an account that will help it grow.
See our picks for the best account options today:
It’s important to have a financial safety net in case of a financial emergency, such as a car repair or job loss. An emergency fund can help you keep your budget intact and avoid taking on new debt to cover a surprise expense.
It is generally recommended that you keep enough money in your emergency fund to cover three to six months of living expenses, although you may need more in certain situations. If you don’t already have an adequate emergency fund, a year-end bonus could help you get started.
Read more: How much money should I have in an emergency savings account?
One of the best things you can do for Future You is to invest for your golden years. In particular, retirement accounts like 401(k)s and IRAs are a good option because you can contribute pre-tax dollars, allowing you to reduce your tax bill in April (or get a larger refund), as well as defer taxes . until you make withdrawals.
For tax year 2024, you can contribute up to $23,000 to a 401(k), and an additional $7,000 if you’re age 50 or older. If you haven’t prioritized saving for retirement in the past, or want to make the most of an employer match, you can ask your payroll department to direct some or all of your bonus to your account.
Read more: 401(k) vs. ANGER: The Differences and How to Choose Which One is Right for You
As we mentioned, there’s nothing wrong with splurging from time to time, as long as your financial obligations are up to date.
If you don’t want to feel like you’re depriving yourself, set aside half of your bonus for a “responsible” purpose and use the other half however you want. This can give you the boost you need to stay on track when it comes to your financial goals while still enjoying the fruits of your labor.
Read more: How much of your salary should you save?
