How to Spend a Holiday Bonus

Do This, Not That With a Holiday Bonus

Getty Images

The holiday season brings plenty of good cheer but it can also bring a financial windfall if you're on the receiving end of an employee bonus. Sixty-three percent of human resources and hiring managers said they planned to offer employees a bonus in 2017, according to Accounting Principals. The average payout for bonus recipients is expected to be $1,797. 

Getting a bonus may relieve some of the stress of wondering how you'll pay for holiday gifts but that's not the only way to put it to use.

There are a number of other ways to spend a holiday bonus, however. With the right approach, you may be able to reap the rewards of a holiday bonus all year-round. Here's how to do it. 

Use a Bonus to Pay Down Holiday Debt

Credit cards can be a convenient way to pay for holiday shopping but they can lead to trouble in the New Year. In a 2016 Magnify Money survey, Americans who added to their credit card debt over the holidays increased what they owed by $1,003 on average. 

If your holiday bonus matches up with the $1,797 average, you could wipe out that amount of credit card debt and still have something left over. If you'd rather spend a holiday bonus elsewhere, consider transferring your balance to a card with a lower introductory rate. Reducing the amount of interest on the debt can save you money, while allowing you to pay it off faster. 

Play Catch Up With Your Retirement Savings

One-third of Americans have nothing saved for retirement, while 55 percent have less than $10,000 set aside for their later years.

If your retirement account balances are lower than you'd like them to be, a holiday bonus is a prime opportunity to change that. 

If you don't have an individual retirement account, for example, you could use a holiday bonus to open one. You have two choices: a traditional or Roth IRA. With a traditional IRA, you may be able to deduct the contributions you make each year, up to the annual contribution limit.

Deductions reduce your taxable income, which may help lower your tax bill if you're in a higher tax bracket. 

With a Roth IRA, there's no deduction for contributions but you're allowed to make qualified withdrawals in retirement tax-free. That can be extremely valuable if you anticipate being in a higher tax bracket when you retire. And, if you're earning a lower income now, you may be able to reap an additional benefit by claiming the Retirement Saver's Credit when you contribute to a Roth IRA. Credits reduce your tax liability on a dollar-for-dollar basis, potentially resulting in a lower tax bill or a bigger refund. 

Enhance Your Emergency Cushion

An emergency fund can be a financial life raft when an unexpected expense derails your plans. Yet 57 percent of Americans have less than $1,000 in the bank for rainy days. If you'd rather save than spend a holiday bonus, you could use it to jump start your emergency savings account. 

But where's the best place to park a bonus? A regular savings account offers safety and convenient access, but traditional banks typically offer very low interest rates. If you'd like to grow your money faster and you don't mind forgoing the ability to visit a branch, a high-yield savings account from an online bank may be the better option.

Just remember to review the interest rates, fees and the options you have for accessing your emergency savings when you need it. 

Start Your Home Down Payment Fund

If buying a home is in your future, you'll need a certain amount of cash to seal the deal. A big chunk of that centers on your down payment. In a Zillow survey, more than two-thirds of renters said a lack of down payment savings was the biggest obstacle standing in the way of buying a home. 

The question is, how much cash is needed for a down payment? While 20 percent is the industry standard, it's possible to buy a home with less than that. An FHA loan, for example, allows you to buy with just 3.5 percent of the home's purchase price down. For a $200,000 home, that's $7,000. Earmarking a holiday bonus for a down payment could put you a few steps closer to your dream of buying a home.

 

Use a Bonus to Do Good

The holidays are a great time to give back to others. If your debt's under control and your savings are on track, you could spend a holiday bonus by donating to your favorite charity. In addition to doing good, you may be able to snag a tax benefit in the form of a deduction for those donations. The Internal Revenue Service allows you to deduct donations totaling up to 50 percent of your adjusted gross income. 

Remember, however, that you must itemize to claim a deduction for charitable giving. If you normally take the standard deduction, you could still make the donation but there would be no tax benefit. And also keep in mind that if you are donating a holiday bonus, you'll need a detailed receipt from the organization you're donating to for tax purposes. 

Invest in Yourself

Treating yourself is one final way to spend a holiday bonus but take some time to think about what would yield the most value. You could go on a shopping spree, for example, but you may get more leverage from a bonus by using it to expand your skill set or develop a side business in addition to your 9 to 5 gig. Alternately, you could invest in a gym membership or exercise equipment to improve your health. Thinking about the goals you want to achieve for the New Year can help you decide how best to spend a holiday bonus on yourself.