Surprise: you just found out you’re going to get a holiday bonus! That’s great news, but how are you going to spend it?
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Financial experts say there is definitely a strategy to use when you get a holiday bonus, but many people will make the wrong moves.
Here’s what not to do and how to smartly use your holiday bonus instead.
1. Hitting Up the Mall
When extra money lands in your bank account, a little shopping might feel harmless. “You go to the mall ‘to look around’ and end up with new shoes, a watch that tracks steps and a 65-inch TV you never knew you needed,” said Keith L. Magness, attorney and CEO at Magness Law. But he warned that a splurge isn’t the best use of your bonus “if the shopping bag is larger than your savings.”
This doesn’t mean you can’t spend some of your bonus at the mall. Instead, Olivier Wagner, founder and CEO at 1040 Abroad, recommended only spending a portion of it. His recommended breakdown: 30% for discretionary spending, 40% for investments and 30% for debt reduction.
“The most effective clients are those who use bonuses as instruments of leverage in relation to financial planning, not as ‘candy’ for immediate consumption at larger periodic intervals,” Wagner said.
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2. Methods That Accrue Little to No Interest
You might think that putting your bonus into a savings account is a safe bet. The reality? Sometimes. “The most unfortunate thing is to invest a personal holiday bonus in passive investment funds or savings accounts and leave it there lying idle, getting small interest,” said Baris Zeren, the CEO of Book Your Data.
You should move your funds into a high-yield savings account where they’ll accrue interest without you having to do anything else.
If you’re especially ambitious, Zeren said you could spend the money leveling up your skill set. Your skills could earn you a lucrative raise in the future.
“Mastery of higher-level data analysis, marketing automation, or sales strategy with intensive courses would change you into a more useful business executive and create consulting streams of revenues that would continue to pay long after the bonus funds have been expended,” said Zeren.
3. Paying Off Debt (Without a Plan)
Using your holiday bonus to pay off debt is a great idea, so long as you don’t pay off so much that it actually ends up costing you.
Wagner explained that he had a client who used his holiday bonus to pay off all of his debt, without remembering he had a large bill coming that he’d need to pay as well. “He consequently had to use a high-interest credit card,” he said.
Make sure that you take a holistic view of your finances and incoming expenses before deciding how to spend your bonus.
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This article originally appeared on GOBankingRates.com: 3 Worst Ways To Use Your Holiday Bonus Before the End of the Year
