The holidays are an especially joyous season if you receive an annual bonus from your employer. According to a recent survey by the consultancy Challenger, Gray & Christmas, nearly 80 percent of surveyed companies are doling out holiday bonuses or gifts, compared with just over half in 2013. If you're on the receiving end of a year-end bonus, what should you do with the extra cash?
10 Smart Ways to Make the Most of Your Holiday Bonus
A bonus may push you into a higher tax bracket, but the marginal tax rate system in the U.S. means you pay additional taxes only on the income earned above the bracket's floor. On the other hand, if the bonus pushes your total income above a certain point, you may become ineligible for certain tax deductions. This is a rare occurrence for middle-income earners, however; it typically hits high-income individuals (and there are ways to offset the increased pay by planning ahead).
One way to make the most of your bonus is to stash it in an investment account. This can be a good opportunity to get started on the retirement savings you keep putting off until you have "enough" to set aside. Contributing to an IRA or 401(k) may offer tax advantages, so research carefully before forging ahead.
Financial experts often refer to the 50-30-20 rule: Earmark half your after-tax income for basic living expenses and debt reduction, 30 percent to spend on whatever you'd like, and the remaining 20 percent for a savings account. Divvy up your bonus the same way.
If you don't have any debt and already maintain an emergency fund to cover up to six months of living expenses, take the money and have some fun. Although investing the bonus would certainly be smart, you're probably entitled to a bit of a reward.
If you've been eyeing a personal development course, considering training for a career change, or trying out the latest fitness trend, your bonus can help you afford it. The initial outlay may not be trivial, but it can pay for itself over time in the form of a salary bump or lower medical bills.
Whatever you do with your holiday bonus, make sure you have a plan before you start spending. Don't throw the money into an investment without doing the same due diligence you would otherwise perform. Likewise, don't buy on impulse; call on your usual frugal practices and research your way to good deals.