Maximize Your Year-End Bonus: Smart Financial Strategies

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Getting a windfall soon? Here's how to put that cash to good use.

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Key points

• Many companies give out bonuses at the end of the year.
• Here are some smart things to do with that money.

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Not everyone who works hard all year long gets a year-end bonus as a thank you for a job well done. But many companies do have the practice of rewarding workers in the form of a lump sum of cash.

If you'll be getting a year-end bonus, you may be tempted to spend that money on something fun, like a vacation. After all, it's extra money that you've earned, and so you deserve to enjoy it to the fullest.

Before you rush to spend that bonus on something fun, recognize windfalls like that may not come your way so often. You may want to consider using that money to tackle these important financial moves.

1. Start or grow your emergency fund

No matter your age or income, it's important to have money in savings for unplanned bills or for a period of unemployment. Generally, a solid emergency fund is one with enough money to cover three to six months of essential living costs. If you don't have any money in a savings account right now, you should absolutely use your bonus to build yourself a safety net. Even if you do already have savings, if it's only enough to cover, say, a month of expenses, then boosting your emergency fund is a smart move.

2. Pay off high-interest debt

The longer you carry a credit card balance, the more interest charges you'll rack up. Plus, too high of a credit card balance could impact your credit score in a negative way, making it more difficult to borrow money when you need to. If you're set with emergency savings, you should really consider using your bonus to chip away at the credit card debt you've racked up.

3. Pay off healthy debt

While a personal loan or auto loan may be a healthier type of debt to have than a credit card balance (your score won't take a hit with these loans as long as you make your ongoing payments on time), paying off your debt early could still save you money on interest. Just as importantly, once you eliminate those monthly payments, you'll have more leeway in your budget to spend on other things.

4. Make home improvements

Updating your home won't just make it more enjoyable to live in. You might also increase the value of your home. You never know when life circumstances might force you to sell your home, such as if you need to relocate for a job. Having a renovated home might really work to your financial benefit in that situation.

5. Invest in your career

Getting a bonus is a nice thing. But what if you could set yourself up to earn more money on an ongoing basis? If you use your bonus to further your education or learn new job skills, you might manage to command a higher salary in the new year -- one that pays you a lot more than what your bonus comes to.

Getting a bonus is something to be happy about. Before you rush to spend that money, though, think about the ways it could improve your broad financial picture.

That said, it's not unreasonable to spend some of your bonus on a fun treat if you're using the bulk of that money to work toward an important financial milestone. If you're getting a $1,000 payday in December and put $900 of it into the bank, spending $100 on concert tickets isn't something to feel guilty about. The key is to take advantage of that windfall, especially if getting a bonus is something that doesn't always happen in your world.

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