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You’ve worked hard all year — if you’re getting a year-end bonus, you deserve it! To avoid a surprise tax bill, it is common practice for employers to pay a year-end bonus the following year. That lets you plan ahead for the windfall and decide how you want to use the funds.
There are endless ways to use your year-end bonus. You may be wavering back and forth between splurging and putting it all toward your financial goals. Both will enhance your overall well-being and health.
I tell all my clients to create a mini-budget for how they plan to allocate their bonus across various financial goals while leaving some room for personal purchases. Here are three ways you can strategically use your bonus.
1. Allocate some toward your travel fund
As the motto “work hard, play hard” suggests, work-life balance is crucial to our health and overall well-being. As reported by Everyday Health, the American Psychological Association says vacations are linked to better health outcomes and overall higher life satisfaction.
It’s worthwhile to allocate some of your bonus to invest in you and your well-being. That way, you can enjoy the fruits of your labor and create lasting memories.
By funding this account, you could earn additional interest by placing this money in a high-yield savings account. If you were saving each pay period to this account, you could instead reallocate those funds to another financial goal, such as paying down high-interest debt or saving for a large purchase.
2. Diversify your retirement assets
In addition to carving out some of your bonus for travel, consider investing in your future. There are many benefits to diversifying your retirement plans, such as tax diversification and flexibility.
Most people only make pre-tax contributions to their retirement account offered through their employer, such as a 401(k). Along with pre-tax accounts, you might also consider a Roth IRA and taxable investment accounts.
Each account type comes with its own tax advantages. By having all three, you can optimize your retirement tax strategy and manage your tax liability in retirement. The chart below compares these account types:
Remember, there are many limitations and complexities involved with these account types. Seek advice from a qualified financial planner or CPA.
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3. Use some to fund large purchases
Using your bonus to fund large purchases like a down payment or a new car can help you achieve your overall financial goals faster. This strategy could save you thousands of dollars in interest by reducing the amount you need to borrow.
In addition, by funding these large purchases, you can free up cash flow for other financial goals and personal enjoyment. Remember that reducing or eliminating debt is a form of wealth building.
You earned your bonus and should enjoy it. However, remember to aim for a balance between using your bonus to address all your financial goals and splurging on yourself. Diversifying the use of your bonus across different financial goals can help you to enhance your overall well-being and achieve your goals.
Lastly, don’t forget to plan for taxes. Talk to your accountant or CPA to discuss the appropriate tax withholdings necessary for your bonus.
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