5 Ways to Use Your Christmas Bonus (or Other Financial Windfall)

Whether you get a Christmas bonus like clockwork every year or it’s about to happen for the first time, this year-end influx of extra money always delights. You feel a freedom to spend in ways you normally can’t and it comes at just the right time, when travel and gifts have done a number on your bank account.

When you see that extra bump in your paycheck, you have a couple of options. The first inclination is usually to spend it: to treat the bonus check like house money and use it in lavish ways. Everyone should indulge in a little carefree spending from time to time, and using a holiday bonus for frivolous expenses or a treat for your family isn’t the worst thing in the world.

However, if you haven’t already committed to a Caribbean cruise or a down payment on a swimming pool, you could benefit from taking a step back to assess your financials and think of the absolute best way to use that money. Maybe you’re in a position to buy a yacht; maybe this money helps you to finally pay off those student loans. As you start writing checks in your brain, consider these five options and see how you can make the most out of your extra dough.

1. Debt and Emergency Fund

Let’s start with the topic that’s the least exciting and the most important. If your job hands you an opportunity to get rid of debt and burdensome interest payments, you take that option straight to the bank (or whichever institution has a death grip on your credit accounts).

This option is painfully simple and yet still avoided by many. If you pay down your debt, or at least a significant portion of it, you end up paying far less in interest later. Even if you feel financially stable, making six figures with no house or car payments, any accrued interest handcuffs your earning potential. For so many people, monthly credit card bills could be reduced if not for a little bit of laziness mixed with a lot of impulse control issues. Stop justifying the money you lose every month and get that debt off the books!

The steps you take to pay down balances have to be at least somewhat planned out. For example, you don’t want to pay down a car loan with a low APR instead of a credit card with a slightly lower balance but an astronomical interest rate. You also don’t want to use your entire Christmas bonus to pay off a credit card when you know you have lofty expenses coming up and no cash reserve to cover them. That’s how people end up in a debt cycle, and ending that pattern is one of the best uses for a holiday bonus.

Cyclical debt keeps a lot of people from ever growing their net worth or starting to save for retirement. No matter how much money you earn, it’s easy to live beyond your means and pay your expenses on a month-to-month basis. However, when every dollar you earn is gobbled up by expected costs, you find yourself in a bit of a bind when the unexpected comes along. Without an emergency fund, you have no choice but to tack on more debt.

Emergency savings provide the best safeguard against rising credit card balances, and a one-time holiday bonus might be the perfect way to go from an empty emergency fund to one you can rely on. Even if you have debt that’s consistently cramping your style, putting your bonus check aside for emergency spending will help you avoid credit card debt the next time something comes out of left field.

Got debt? Life will be better once it’s gone. Got debt that comes back every couple of months? That’ll stop when you have a reliable emergency fund. Got a Christmas bonus on the way? Using it to improve your financial stability might make you happier than anything you could buy at a store.

2. Pay for Travel

As glorious as the holiday bonus may be, there’s a good chance it doesn’t even begin to cover the cost of your entire family’s Christmas airfare. December serves as an excellent reminder of how costly it is to travel. Wouldn’t it feel great to have money set aside, ready to cover gas for a road trip or tickets to fly across the country?

You could get very systematic with your bonus money, assuming you have the luxury of getting one every year. With that kind of consistency, you could put 2023 money toward 2024’s travel. Do that every year, and you’ll spend far less time panicking about the cost of flights, even if it takes the excitement out of receiving a holiday pay bump.

I will say I’m not the biggest fan of expecting a bonus. I think every company and employer should show appreciation to their workers and share profits whenever possible, but mitigating factors can easily influence the availability and amount of your yearly bonus. As wonderful as it is to receive this financial windfall, it’s equally horrible when you’re counting on it and it doesn’t arrive.

With that said, you can still set this year’s money aside for next year’s travel and then start adding cash to your travel fund whenever possible. One bonus could be the starting investment that turns you into an awesome travel budgeter, making it easier to take more trips without feeling the financial hurt. Just as a healthy emergency fund can kill off the debt cycle, maintaining a savings account for travel can help you avoid buying plane tickets you can’t afford.

For those of you who don’t make an annual trek to see the in-laws or take the kids to visit a favorite national park, a holiday bonus might allow you to take that vacation you’ve put off for years. Some itches you just have to scratch, and if you won’t rest easy until you’ve seen Stonehenge or Wrigley Field (drastically different vacations, I know), you deserve to make that dream a reality. Just as you shouldn’t let a vacation cripple your finances, you shouldn’t hesitate to use bonus money for once-in-a-lifetime experiences.

Of course, there are the other forms of travel worth saving for. Weddings and family gatherings, college graduations and high school reunions – it seems like the list of places to go never shrinks. If you have a lot of destination obligations, take those into consideration. If you have your own wedding or anniversary coming up, definitely consider saving some money for that event. We will always be pressed to travel, and your holiday bonus might just be the thing that lets you make those trips happen.

3. Charity

Giving back is a very important part of my life, and I don’t say that with a hint of boasting. I recognize that I’m fortunate enough to engage in acts of tithing that make my heart feel full, and I believe the act of charity resonates with all of us. In the same breath, I recognize giving money away isn’t always easy or feasible.

If you can manage expectations and avoid mentally spending your bonus check before it arrives, it becomes easier to take bold action when the funds hit your account. Suddenly, you have a few thousand dollars that can go directly to an important cause without experiencing tremendous buyer’s remorse. You should never feel spiteful after showing generosity, but that’s often the case when people give what they don’t have. When you have a decent salary and spend wisely, your bonus affords you an excellent opportunity to give without reservation.

While I strongly believe in tithing and the good it can do for the provider, I know it’s something that has to be practiced in order to readily see and feel the reward. You can know in your heart that giving is good, but that won’t necessarily lead to consistent charitable giving.

I see it with my children as I encourage them to be generous and, at times, they resist. A child usually won’t take kindly to the idea of giving up a toy, as that immediately leaves them with one less toy. It takes practice to see that giving makes people happy, and others’ happiness can become your own when you’re responsible for it.

It may take some convincing and a shift in mentality; you’ll have to train yourself to feel less possessive of your money, and to put the needs of others above your own. Using a financial windfall can help expedite this process, allowing you to give big at first and then dial it back with however much of your regular salary you can afford. No one will fault you for giving less at times, and you’ll have the peace of mind knowing you gave as much as you could, when you could.

And, of course, there’s the practical, albeit less fulfilling, angle of charitable giving: the tax write-off. It’s the end of the year and you’ll have to deal with the IRS soon, so why not go out with a nice, big, deductible donation? If that’s the push you need to give back, go ahead and use that motivation.

4. Save for Retirement

Long-term goals can be so boring. But they’re almost always so worth it.

If you get a one-time bonus of $3,000 and put it into a Roth IRA, it’s entirely possible that investment could be worth a couple of million when it comes time for you and your spouse to retire. We can talk about the strategies and variables all day, but such growth is absolutely possible.

Now imagine an annual Christmas bonus, put into the same retirement account every year. Suddenly the idea of maxing out your contributions doesn’t seem far-fetched. If you are already contributing the IRA maximum, you can put money into a separate brokerage account and grow funds that way. When you’re working with one or two or three thousand dollars, you can really put that extra money to work at saving for retirement.

One reason I love the idea of investing your holiday bonus is how it limits the normal apprehension that comes with retirement savings. For those of us who contribute regularly, there are months when you end with less money than you started with. In the short term, that can be incredibly frustrating. In the long term, that’s just how investment accounts work.

When you put a significant bonus into your IRA, it helps with two factors. First off, it’s harder to feel like your money disappeared. Putting $100 dollars into an account one week before the markets take a serious dip can have you feeling like your contribution never happened. When you put $1,500 away, you’ll feel a bit more confident about weathering the storms.

Secondly, bonuses have that air of free money about them. That’s what makes so many people want to spend them on extravagantly useless items. Investing free money doesn’t carry the same excitement, but nothing feels better than watching a bonus double in value over the course of a year or two. Without setting aside money each month and seeing your paycheck dwindle in favor of saving for retirement, you can make a big financial splash all at once with pennies from heaven.

Putting a portion of your holiday bonus into an IRA is a good idea. If you have the flexibility to throw in the whole thing, retirement could just arrive a little earlier than you expected.

5. Treat Yourself

Most financial advisors won’t point you in this direction, but I think life is too short to be like most financial advisors. If you work hard all year and do your best to pay bills, save for retirement and provide for your family, I fully endorse some discretionary spending.

If you go this route, I do want you to make it count. One fancy dinner for you and your spouse is fine, but two straight weeks of $50 entrees is overkill. Don’t buy the newest home fitness equipment if you haven’t exercised in years, and don’t buy a busted-up classic car with a vague plan of watching YouTube videos to learn how to repair it. The last thing you want is to regret how you spent this one-time financial windfall.

I can’t tell you what to buy, but I can throw out a few suggestions for those in need of direction:

● Furniture

● Sporting equipment

● Car maintenance

● Home renovation

● Landscaping

And clothes and presents and jewelry and whatever else is on your wishlist. For my money, things like home repair, nice furniture, and landscaping make the best use of your extra money. If you put your holiday bonus toward a home addition, the money you spend helps your property value. A good sofa or bed can be with you for decades, making that purchase a smart one that will save you on replacement costs. There are things you can buy that don’t qualify as financial investments but still manage to impact your future finances, and I hope you have a few of these options on your radar.

As you decide how you want to spend your holiday bonus, take some time to recognize the blessing of it all. You’re employed and your employer wants to show appreciation for your work. If you allow yourself to feel some gratitude for the money, I think you’re a little more likely to take care and spend it wisely. ‘Tis the season for all kinds of graciousness, so hopefully that’s how your holiday bonus has you feeling.

Make it happen!

Taylor & Megan Kovar

The Money Couple