Not everyone will receive a holiday bonus this year; however, for those of us who are lucky enough to get some extra cash this holiday season resist the urge to spend your entire bonus on toys. Spending holiday cash is often considered much more fun than investing money but the returns from investing outweigh the short-term enjoyment of holiday shopping. Five smart ways to spend your holiday bonus include charitable donations as well as saving money for a more secure financial future.
1. Charity – This may not be investing in your financial future; however, it is investing in something far greater. My husband and I feel strongly about giving back to our community when we are blessed. Beyond the obvious pro of giving to charity (you help someone in need), you can reap tax benefits to reduce your overall taxes at the end of the year. Check with your accountant or tax preparer to determine what amount is the best for your income level.
2. Invest in a Traditional IRA or a Roth IRA – This is an intelligent way to spend your holiday bonus to ensure you will have funds available for retirement. If your company is agreeable, you may even convince them to contribute directly to an Individual Retirement Account to decrease your taxable income for the year rather than pay a traditional holiday bonus.
3. Open a Stock Portfolio – This may sound risky; however, if you open a stock account with your holiday bonus and invest using dollar-cost averaging, you will see your money grow over the long-term. Dollar-cost averaging is the regular purchase of stocks at set amounts to reduce the market risk of investing in the stock market. Because you invest the same amount of money each week or month, when the stock market falls, you buy more stocks for less per stock but when the market rises, you buy fewer stocks at higher prices.
4. Pay off high interest debt – This may not seem like a fun way of spending your holiday bonus and some may argue that this is not an investment. However, making minimum monthly payments on a high interest credit card balance will cost you much more money in the long-term. If you pay the balance in full with your bonus, you can then invest the money you were spending each month toward credit card payments in an investment account so the interest is to your benefit rather than to the credit card company.
5. Create an emergency fund – From working with bankrupt clients, I have noticed a trend that seems to be common in most cases – – they have no emergency fund for unexpected expenses. They also do not save in advance for insurance payments, tax payments and other annual expenses that are large. I have read where some financial experts advise having two months’ salary in savings for emergencies and some advise having up to six months’ salary in savings for emergencies. No matter what your bonus equals, it is smart to put some of that holiday bonus into a savings account that you can access for emergencies or annual expenses instead of stressing your monthly budget or borrowing.