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7 Responsible Ways To Spend Your Holiday Bonus

Posted By Jim On 12/04/2007 @ 8:35 am In Personal Finance | 12 Comments

Okay okay, earlier this week I wrote seven irresponsible and fun ways to spend your holiday bonus [3] and now I’m going to throw a bone to the responsible crowd out there and list the seven responsible things to do with your holiday bonus. Personally, I think everyone is a mix between the two (or at least I am between the two). If you spend your entire bonus on fun things, then you aren’t saving enough for the future. If you save the entirety and do responsible things with your bonus, then you aren’t really enjoying the fruits of your labor. What I think you really need to do is find a nice happy medium between the two without going overboard in either direction.

1. Eliminate Debt

Are you carrying any high interest credit card debt? Before your spend any of that bonus on anything, put it towards your debt. Before you save for your retirement, pay down your debt. Paying down a credit card debt at 19.99% is like earning 19.99% on an investment (not exactly, but you get the idea), so pay down that credit card debt as soon as possible. Before you can build your personal finance house, you need to firm up your foundation. In this analogy, firming up your foundation means getting rid of all of your debt so that you can start fresh.

2. Pump Up That Roth IRA

You have until April 15th of next year to make a contribution for this year, using your holiday bonus towards this is a great opportunity to save for your retirement. Now, if you haven’t put anything in your Roth until now, I recommend that you revisit your retirement savings strategy for next year and put a little away each month. You may not get a bonus (or as much of a bonus) next year so waiting for it to arrive before making a contribution is risky. If you’ve contributed for this year, consider saving it and contributing it towards next year. By making the contribution as early as possible you let your money grow as long as possible.

3. Bolster Your Emergency Fund

Do you have three to six or twelve months of expenses saved away in your emergency fund? If not, then you should consider saving a part of your holiday bonus into a high yield savings account [4] for a rainy day. An emergency fund is a crucial part of your overall savings picture. It allows you to weather the emergencies in your life without having to put you in a debt hole that you have to climb out of. At a minimum, I recommend three months. I personally keep around four months but that’s because we have two incomes (I would recommend at least six months if you only have one income).

4. Consider A Home Renovation Project

Now is a great time to consider a home renovation project if you own your own home. What’s great about a renovation project is that you get the benefit of the renovation plus the potential increase in home equity. Now, not all renovations are created equal so don’t think that you’ll get back every dollar you put in. Adding a bedroom or a bathroom will increase the value of your home nearly as much as it costs to add it, putting on a sun room isn’t as as valuable. Lastly, this year is the last year to get a tax credit for making energy saving home improvements [5].

5. Make Another Mortgage Payment

If you don’t own your home, then you can skip this one. If you do own your home, consider paying down a little extra principal this month. By paying down more principal, you reduce the amount of interest you end up paying but just a little bit. What actually happens is you accelerate your amortization schedule, a schedule that is front loaded with a lot of interest that benefits no one except the bank. So, by making an additional payment, you are shortening the loan terms and saving yourself significant money on the back end. If you end up doing this each year, then you can shave years off your loan. For example, on a $300,000 loan at 6.25% interest for thirty years, you would normally pay approximately $365,000 in interest over thirty years. If you make a one time payment of $1,000 after the first year (say you started the loan in January and made that extra payment that December), you would reduce your total interest paid by over $5,000.

6. Predict Your Potential Needs & Save

Look towards the next year and try to predict any large capital expenses you may encounter. For example, we’ve been using a water heater that has been here for the last twenty years. It’s a water heater that may or may not need to be replaced in the next year and it’s an expense we’re prepared to pay because we’ve planned ahead and saved enough. An emergency fund is great to handle those emergencies you can’t see coming, but if you think you’ll need some funds for a specific reason it’s often better to save in a separate fund for those cases.

7. Go On A Vacation

That’s right, the seventh responsible idea for spending your bonus is to go on a vacation. Why? It’s because you need to be rewarded for a year’s worth of hard worth and great performance (or at least good enough performance to warrant a bonus!). Your employer saw it fit enough to reward you for your hard work so far be it from me to advise that you don’t actually reward yourself for that hard work. So, go on a vacation, enjoy yourself, and send me a postcard!


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[3] seven irresponsible and fun ways to spend your holiday bonus: http://www.bargaineering.com/articles/7-irresponsible-fun-ways-to-spend-your-holiday-bonus.html

[4] high yield savings account: http://www.bargaineering.com/articles/top-5-online-banks-savings-or-checking-accounts.html

[5] tax credit for making energy saving home improvements: http://www.bargaineering.com/articles/tax-credit-for-energy-saving-home-improvements-expiring.html

Thank you for reading!