These are the four things you should do with your annual bonus

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• Paying off debt should be your top priority if you receive a bonus.
• Plan for your future by investing in things like a retirement plan and a 529 plan for your child.
• Don’t treat your reward as “found money,” but it’s okay to spend some of your reward on something fun.

If you are set to receive a bonus this year as part of your total compensation, it is important to have an idea of ​​what you will do with that money before you receive it. Whether you are looking to make a major purchase, Except for retirementor moving forward with your bills, there are a few things you need to keep in mind.

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1. Use your bonus to pay off your debts

As your number one priority, consider whether you have any unsecured debt, such as credit cards or personal loans. These types of debt tend to come with higher interest rates and are a great candidate for an aggressive repayment strategy that includes a portion of your reward. Otherwise, the money you pay in interest can cost you much more over time.

And don’t forget about any student loans you may have. Even if you are lucky enough to get one Student loan Payments have been frozen since the onset of the COVID-19 pandemic, it is important to remember that these payments will inevitably resume. While it may not seem like it in the moment, in the long run it can be beneficial to reduce a portion of your principal balance now while you have the cash on hand to do so.

2. Save your bonus for retirement

If you don’t have any unsecured debt to worry about, or if you can pay it off and still have the extra dollars to work with, the next place to look is in retirement savings accounts. Aside from the benefits of compound returns, workplace retirement accounts provide a dollar-for-dollar reduction in taxable income on your entire contribution, up to the allowable IRS limits.

Some employers even offer the ability to make excess contributions beyond the annual maximum using after-tax dollars. And depending on your income level and seniority within the company, you may even be able to access a supplemental executive retirement plan. These plans are generally contributed through payroll deductions and allow you to invest in the same mutual funds or company stock as available in the master retirement plan.

If you’ve already maxed out your 401(k) or otherwise Workplace retirement accountconsider contributing to a Roth or Traditional IRA also. Either of these two types of accounts will allow you to increase your retirement savings and make good use of a portion of your bonus. Just be aware that the contribution limits and tax deduction for those contributions will be based on your overall household income, and in some cases, you may be excluded from participating altogether.

3. Invest your reward in your goals and yourself

From here, it is important to keep in mind the rest of your long-term goals and which ones are your highest priority. For example, if you’re looking to buy a new home within the next two years and already have a savings goal, that would be the obvious best use of that money.

However, if saving enough to send your child to college is higher on your list, it would be a good idea to set aside some of your rewards for a savings plan designed to cover those expenses. a 529 education provision plan It can be an excellent college savings vehicle, because earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses.

If your current financial situation is strong and you don’t have any other immediate financial needs, consider investing. investment It can help grow your money over time and provide long-term security, as well as additional income in the future. Resist the temptation to invest in a customized way. Instead of choosing a hot little Stores Or day trading, take a more systematic approach that aims for better returns than a bank account, but not so volatile that it keeps you up at night.

Instead of investing in traditional stock and bond investments, another smart way to use your bonus is to invest in yourself and your career. Consider taking classes that can help you advance professionally. This can include anything from certifications or industry-specific training to courses related to skills such as public speaking or project management. Not only will investing in yourself boost your career value today, but investing in your career prospects now can pay off later when it comes time to negotiate a salary increase or promotion.

4. You can splurge some, but stick to the 10%

You may be tempted to spend money on something fun and unimportant, but it’s worth considering ways to get more value out of those dollars. It is important to view the bonus as part of your total compensation, rather than treating it as “find money”. I worked for it. You didn’t win the lottery.

With that said, it’s important to treat yourself as important as investing in your financial future. Be sure to take 10% of the money you receive as a bonus to buy something for yourself as a reward for your hard work and diligence. This could mean buying something you’ve wanted for a while, like an expensive piece of jewelry or a piece of clothing. It could also mean spending the weekend somewhere new and exciting. This kind of self-care is important and helps make sure you stay motivated to keep up the good work.