What to do with your bonus money: 7 things to consider

A bonus at work is not a sure thing. But landing one can be a great, great thing. Sometimes the only trouble is knowing what to do with your bonus money. Fancy new bag? Weekend getaway? Finally getting that emergency fund started? These are all potentially smart uses for a year-end bonus, depending on your situation.

Figuring out what to do with your bonus money is a question you may well have to answer as you succeed at work. Your best move is to plan in advance for any extra cash that could come your way.

Whether it’s a year-end perk or a recurring reward, here are some important ways to think about and use your bonus:

1. Understand your employer’s bonus structure

A work bonus is extra pay that an employee receives in addition to a salary and is typically awarded for successful individual or team performance. The timing of awarding bonuses and their structure can vary by industry, company, and even department.

Before you can decide what to do with your bonus money, you’ll need to understand how and when people earn bonuses at your company and whether you are eligible to receive one, says Lance Cothern, founder of a financial blog. While some employers pay bonuses to all employees when the company reaches its goals, other companies base the rewards on individual performance (or a combination of both). Your employee policy handbook should include this information, Cothern says. If not, consider asking your boss or someone from your human resources department for more information—including when bonuses are determined and paid out.

However bonuses work at your job, don’t count on one as part of your annual income. Bonus amounts can change from year to year, and sometimes they don’t happen at all.

“You don’t want to get yourself into a position where if you don’t get a bonus, you are in a financial tough spot,” says David Weliver, publisher of an independent financial website.

2. Remember that it’s not a lottery ticket

When deciding what to do with your year-end bonus, be careful not to treat it as if you won the lottery or got a prize that you weren’t expecting, Weliver says.

You may be more likely to spend money framed as a windfall (a large amount of money won or received unexpectedly) and to save money framed as a reimbursement. The bottom line? When money feels like an addition to your bank account, you’re more likely to feel like you can spend it. On the other hand, you’re more apt to hang onto money that feels like compensation.

To figure out what to do with your bonus money, “treat it as earned income,” Weliver says, “because it is. You worked for that bonus.”

3. Avoid frugal fatigue

Smart uses for a year-end bonus can help alleviate “frugal fatigue,” the state of exhaustion from pinching pennies that’s commonly felt by anyone on a budget.

People who feel frugal fatigue most strongly are the least likely to stick to good spending habits when their financial circumstances improve, Weliver says. Similarly, young people who are dealing with student loans and credit card balances and focused on getting out of debt as fast as possible can actually get burned out if they don’t treat themselves once in a while.

Enter: Your bonus. Smart uses for a year-end bonus may include spending some of it on yourself, some of it on bills and other financial obligations, and some of it to save or pay off debt, Weliver says.

To start, “It’s a good idea to take between 10 to 25% of it and use that for yourself,” he says. “Positive reinforcement that you can enjoy a little bit of your money makes it possible to keep working hard.”

4. Make a financial plan

After setting aside funds for a small treat, you can use the remainder of a work bonus as an opportunity to meet your larger financial goals.

Financial plans are extremely important when it comes to the best ways to spend your bonus, Cothern says.

“If you don’t have a plan for how you’d use your bonus money,” he says, “it usually ends up getting spent in small amounts here and there with nothing left to show for it.”

Although each person may spend their bonus differently, smart uses for a year-end bonus include paying off high-interest debt first, Weliver says. After paying down debt, consider starting an emergency fund with a few months of expenses in the bank, Cothern adds. Next, consider saving money for retirement or other big goals.

5. Spend and save thoughtfully

Even if you’re in good financial shape, one of the best ways to spend your bonus is in a thoughtful way, rather than spending it all at once on an impulse purchase, Weliver says.

“Whether it’s things or experiences, what brings you the greatest amount of happiness for the dollars you spend?” he says. “Make a conscious choice before you go out and spend.”

Smart uses for a year-end bonus may also include contributing to a long-term goal, like buying your own home, starting a business or jump-starting a child’s college education fund. When considering the best ways to spend your bonus, consider a donation to a favorite cause or charity, which can often be tax-deductible.

6. Share the wealth

If you’re debating the best ways to spend your bonus, you may find it rewarding to spend it on others. Using your bonus money to donate to charity or spend on others may bring you a sense of happiness. The happiness can occur no matter how big the bonus is.

When people purchase experiences—such as taking a class or traveling—the resulting happiness can increase over time. That’s likely because we tend to share experiences and memories with others. One way to maximize the happiness of spending a work bonus may be to purchase an experience and bring a friend along. You can even use your bonus to plan an experiential gift for your significant other.

7. Stick to your plan

When deciding what to do with your year-end bonus, the best plan is to have a plan. Whether you treat yourself, contribute to long-term financial goals, help others—or all of the above—thoughtful spending (and saving) is the best way to spend your bonus.

Whether you’ve received a bonus or not, here are some ways to boost your earning potential.

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