Getting a bonus is like winning the lottery. Well, not exactly! Actually, getting a bonus is nothing like winning the lottery. The lottery is random and cannot be controlled (or can it?). You buy your ticket and hope and pray that you are the one in a billion to have chosen the right numbers. (Or if you are a conspiracy theorist maybe the right numbers choose you…)
Your bonus, on the other hand, is something that is in direct correlation with the work you put in. You and your employer will usually have a discussion to discuss what it would take for you to earn extra money. If you follow through with what has been laid out, then… cha-ching! With all the hard work that went into you getting this extra chunk of change, it would be a shame if you just blew it on things that do not matter (or a stack of lottery tickets hoping to make more money).
The following are eight smart things you can (and should!) do with your bonus.
1. Start (or contribute more to) a financial freedom fund.
It is a good practice to have at least six to eight months worth of expenses in a high yield savings account as an emergency fund or, as I like to call it, a financial freedom fund. Use your bonus as an opportunity to either start your own financial freedom fund or put more into it. Having this money in an account will help you weather any financial storm and/or give you the strength to walk away from a toxic working environment.
2. Put more money into your 401(k).
A 401(k) is a great way to save for retirement. Even more so, if your employer provides a matching program, it gives you even more of a reason to start participating. Your bonus can give you the cash flow you need in order to increase your 401(k) contributions. While tax laws may not allow you to deposit your bonus into your 401(k) directly, having access to the extra cash will allow you to increase what you normally contribute from your check without the fear of not having enough money to meet your budget.
3. Fund a college savings account for your kid(s).
If you have kids and haven’t started a college savings account for them already, this is a great way to get a head start in the college planning process. Start a 529 savings plan for your kid(s) and allow the money to grow tax-free for their education.
4. Put money aside for a big purchase.
Many of us would love to buy a new car, fancy furniture, trendy electronics, or upgrade our wardrobe, but may not have had the funds to do so. If your bonus is big enough, this may be the time to set aside money to make a big purchase. While I don’t suggest that you use all of your bonus, this can give you a head start on achieving your dreams.
5. Start investing in the markets.
Many people do not invest their money outside of a retirement savings plans. But now may be the time you take a shot at it. Investing money outside of your retirement account can give you some good returns in the long run and diversify assets to mitigate risk. Instead of putting all of your eggs in one basket, spread them out to increase your chance of reaching true financial freedom.
6. Invest in yourself.
Author Robin S. Sharma said, “Investing in yourself is the best investment you will ever make. It will not only improve your life, it will improve the lives of all those around you.” Take this opportunity to invest in a certificate program, buy some books, hire a coach, or take an exciting online course (like the ones they offer on Udemy.com). Invest in yourself and allow your value to go up in the long term.
7. Give to charity.
Not only is giving to a good cause a noble thing to do, it can also help increase your blessings. There is a universal law that says, “The more you, give the more you get.” Use this blessing to be a blessing to others.
8. Have some fun!
If you have been following your budget strictly and have been diligent with prioritizing finances, then this might be a good time to let your hair loose. Have some fun—use some of your bonus to simply enjoy yourself! Buy an expensive dinner, purchase a piece of jewelry you’ve always wanted, or go on a two-week excursion that’s on your bucket list. You only live once, so if you’ve been doing so responsibly, then it’s about time to enjoy the fruits of your labor.
What would you do with a bonus? How would you spend it?
This article was originally published on January 24,2017.