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What to do with your year-end bonus: Read these smart financial tips

By Tom Flynn

It’s that time of the year when year end bonus checks are being sent out. If you’re one of those lucky (actually 80% of employers give bonuses) few who get extra cash from your employer at the end of the year, then you might be tempted to splurge this holiday season. But before you start spending your bonus cash, consider saving it rather than spending it.

Many of us fall prey to something known as lifestyle inflation. That’s what happens when our spending increases to keep pace with our income as we make more or experience a windfall like a year end bonus. But that can put you in a dangerous financial situation as you might not be saving enough and spending becomes a habit.

While you might want to set aside some of your bonus to treat yourself, read through these tips for what you can do with that money to improve your financial situation.

Save an Emergency Fund

Very few people have enough money saved in their emergency funds. That means that they could be in trouble in case something bad happens or they have a financial emergency. If they lose their job or their car breaks down, they might have difficulty ensuring that they can pay their bills or repair their vehicle. That’s why experts suggest that you put aside between 3 to 6 months’ worth of your expenses so that you’ll have enough money to cover unexpected expenses when they arise. While your bonus might not be enough to cover your full emergency fund, you can use it to supplement one that you already have or to start saving one.

Pay Off Your Debt

If you have high interest credit card debt or loans, then the first thing that you should think about doing with your bonus money is paying off that debt. Because you are paying a significant amount of money in interest on that debt, there are few things that you can do which will have a bigger influence on your bottom line. You can calculate the amount of money you will save by prepaying debt. You will be pleasantly surprised when you see how much interest you can avoid.

If you have a significant amount of debt, then put your bonus towards the debt that is charging the higher interest rate. You can even use this payment as a way to jumpstart your efforts to wipe out your debt entirely.

Contribute to Your Retirement

If you haven’t yet maxed out your retirement contributions at work and you still have time to do contribute before year end, then you should use your bonus to do so. Many employers match retirement contributions either completely or partly. If you don’t max out your contributions, then you’re essentially leaving money on the table. Don’t let 2016 come to an end without making sure that you get all the money that your employer is willing to contribute towards your retirement.

If you have already maxed out your employer sponsored 401(k), then you might consider contributing towards other retirement funds that you hold. If you put money into a tax deferred investment account like an IRA, you can get a tax credit and potentially get a refund on your taxes.

Save for Big Purchases

Do you dream of buying a new car or a new home? If so, then you could use your bonus money to bolster your savings. It can be difficult to put away enough money for these big purchases and it can feel discouraging when you see how long it is taking you to save enough. By allocating your bonus money towards a big purchase, it could keep you motivated.

Save for College

If you have children, you might be worried about the cost of college when they’re ready to attend. Today, the average college graduate is leaving campus with +$28k in student debt, including both federal and private debt. Rather than worrying, take action! Use your bonus to start saving for college or to contribute to your existing college savings fund. If you put your money into a 401(k), you can also get a state tax credit for your contribution. If you start investing while your children are young, there will be more time for your savings to grow and go further when your kids are ready for college.

Use it Wisely

Whatever you do with your bonus money, make sure that you put it towards something that will increase your financial security and freedom. The more money that you’re able to save now for the future, the better you’ll feel and the more choices that you’ll have later. While it might seem difficult to forgo splurging now – you’ll thank yourself in the future!

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