Home > Personal Finance > 5 Smart Ways to Use Your Bonus

Comments 0 Comments

If you get a little something extra in your paycheck, whether it’s once a year or a few times a year, you are probably ready to celebrate. But, before you get started, it’s a good idea to have a plan for this new sum of money in your lap so it doesn’t disappear as quickly as it came. You worked hard for this bonus — make sure it works hard for you. Consider the 50/30/20 rule where 50% goes to pay off debt, 30% goes to savings and 20% goes to fun. These aren’t the right percentages for everyone so it’s important to look at where you currently stand financially, what your goals are, and these five tips so you can use this bonus the smartest way for you.

1. Pay Off Debt

The first debts that should be paid off with this cash influx are probably personal loans and credit card debt since they usually have the highest interest rates. Get these numbers down to zero, if possible. After you finish these debts, tackle debt with lower interest rates like student loans so you can save on interest and finish these payments ahead of time. The lifetime cost of debt is staggering, so the sooner you can tackle it, the more you can save. Paying down debt can also boost your credit scores, which can save you money in interest on other loans down the road. (You can see how your debt is impacting your credit scores for free on Credit.com.)

2. Max Out Retirement Contributions

If you aren’t at the contribution limit on your tax-deferred plans like 401(k) or a traditional IRA, you may want to put a sizable chunk of your bonus here and reap the rewards later. You can defer paying taxes on the amount contributed, build your retirement savings and compound savings with larger future interest earnings. If your employer makes matching contributions, you can essentially boost the size of your bonus this way.

3. Work on that Mortgage

If you got your mortgage at higher interest rates, you could do some research to see if refinancing your home could save you money in the long run. The bonus could cover the closing costs. Also consider making prepayments to your mortgage to build more equity sooner (only good if you won’t be subject to a prepayment penalty). A lump sum payment now can mean you pay less interest overall. If you don’t own a home, consider creating an emergency fund specifically for rent or a down payment fund to buy a home in the future.

4. Get a Better Savings Account Rate

Since you should hopefully be putting some of your bonus into a savings account, take the opportunity to make sure your account is offering a competitive rate. Shop around and calculate potential yields so you can choose the best savings account for you. You may even qualify for higher rates because of the larger deposit.

5. Indulge Yourself — a Little

Now, the fun part — you used the majority of your bonus for debt repayment and savings, but you worked hard for that cash and, if you can afford it, can get at least a small reward. Splurging may not be common financial advice, but it can be motivational to treat yourself to a massage, new pair of shoes or any possession that was just out of financial reach before. Also consider experiences like a weekend getaway or concert tickets. Just be sure you set limits and don’t get used to this inflated lifestyle — this is a one-time treat.

Remember, the percentages of how you use your bonus are not as important as making sure you are using this money the way it will benefit you most. Assess your current financial situation then calculate the different options and create your own budget for this cash influx.

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team