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Holiday bonuses aren't universal, but in the last few years, the average has steadily increased, reaching $1,800 in 2017. If you are expecting a bonus of any size this year, there are good, better and best options for using that money. Here's what financial experts recommend you do with your bonus based on income, level of debt and savings goals.
Pay Down High-Interest Debt
More than 41 percent of Americans have credit card debt, and if you fall into that group, pay it down with your holiday bonus. The average credit card interest rate has soared to above 16 percent, which means you are paying an additional $16 in finance charges on every $100 you spend (that’s if you don't pay down your balance to zero every month). Given the high rate, experts note it's smarter and more financially savvy to pay down this debt first. You’ll get more bang for your buck by paying off high-interest debt than putting that into lower-interest savings.
Establish or Bolster an Emergency Fund
An emergency savings fund is different from a retirement account. The savings fund needs to be readily accessible and you should be able to withdraw it without a penalty at any time. You can set up a high-interest savings account from many online banks, your own bank, or even a credit union. If you don't already have one, use the bonus money to set one up. If you've already started saving, use a portion (after you pay down higher interest debt) to contribute to the fund which should be used for emergencies or as a substitute for your paycheck in the event you lose your job.
How much should you have in your fund? The most common answer is three to six months' worth of living expenses.
Contribute to Your 401(k) Account
Retirement savings is especially important to start early due to the gift that is compound interest. Even if you are already automatically enrolled in the plan, be sure that you are contributing enough money to reap your employer's full match. While each company matches a different amount, it's common to find mid to large companies that offer a $0.25 to $0.50 match up to six percent of pay. In this scenario, if you aren't contributing at least six percent, you are missing out on free money!
Create Additional Retirement Savings
If you have zero credit card debt, an emergency fund and already max out your 401(k), that's great news and puts you far ahead of the average American household. If you've come this far, why not open an IRA? The amount you can contribute annually to your 401(k) is legally set by the government and maxes out at $18,500 ($24,500 if you are over 50). If you can afford to set aside more than this amount each year for retirement, do it in a tax-deferred IRA account.
Invest in Yourself
Whether it's professional development, a class you want to take for fun or even a vacation that will recharge your batteries and reduce stress, use money from your bonus instead of putting those expenses on a credit card.