How Should I Use My Bonuses in My Budget?

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Many companies will push the fact that they offer quarterly or annual bonuses when you are negotiating your salary, in an attempt to pay you a lower annual salary. This is fine, and you may decide that the additional bonuses or the job itself is worth taking on this pay structure. It is important to create your budget without using your bonus as part of your annual budget.

Bonuses Are Not Guaranteed Income

One of the biggest reasons you should not do this is because your company can stop issuing bonuses at any time.

They may cut back because the company is not doing very well that quarter, and they want to cut bonuses rather than laying people off. They may also decide that you did not meet the performance expectations for your bonus. Your bonus is not entirely in your control, and so you should avoid relying on it as a regular part of your income.

Focus Bonuses on Your Goals

You can use the bonus to help you reach your financial goals, such as paying off debt or funding your emergency fund, but you should also be working towards these goals separately as part of your monthly budget. If you rely only on your bonuses to reach these goals, you may not make any real progress on them during slow economic times, which can be very frustrating. If you know you are making progress regardless of your bonus situation, you will not be as stressed out when your bonus is not what you expected. You will also be able to reach your goals more quickly.

Use Your Bonuses for Your Extras

You can use your bonus to fund your luxury items, with the understanding that you will not purchase certain items or go on vacation unless you receive your bonus. This also means that you should not spend this money until you actually receive it. For example, you may decide to use your bonus each year to cover your family vacation with the understanding that you will not go on vacation if you do not receive the bonus.

This way your vacation will not ruin your budget. You may also use the bonus towards annual swim passes for your family or passes towards an amusement park. However, you simply do not renew the passes if you do not receive your bonus. Try to do this with items that renew annually, so you do not have the money coming out of your check each month.

Make a Plan for Your Commission

If you are working on a commission-based salary, you will handle this differently than you would a true bonus. You would need to set up a budget for a commission, and then budget by setting aside money on your good months to cover your slow months. This is a different process from how you should handle your bonus. It is important to create a plan to help you spend your bonus. If you do not, you may end up overspending your bonus money.

Create a Budget for Each Bonus

If you do not create a plan for spending your bonus, you may end up spending more than you received in your bonus. You should handle this similar to budgeting for a windfall. This means that you divide up the money between your financial goals and doing something fun with the money. If you are out of debt and own a home, you may already be doing very well  on your financial goals and then you can use the majority of it on fun spending.

However, it is always a good idea to invest or save a part of it 

Do Not Depend on Your Bonuses

Again it is important to realize that your bonus is not guaranteed income. Your company may slowly phase out the bonus or reduce the bonus over time. Some companies offer a bonus based on how well the business does overall, and this means that some years it will be huge and other years it may be nothing. You should not include your bonuses in your budgeting estimations when you are trying to determine how much you can afford to borrow for your mortgage or to determine if you can take on another car loan. If you are relying on your bonus to make it each year, you will need to change the way you are spending money or look for a job with a higher annual salary. This will protect your finances in the future.