Best Ways to Spend a Holiday Bonus

Quick Answer

Before you use up your holiday or year-end bonus, think twice about how you’d like to allocate it. With a little planning, you can use bonus money to improve your financial outlook, save for future splurges like vacation and even get yourself something nice.

Two friends walking around holiday shopping

Did you get a holiday or year-end bonus? Receiving a few extra dollars at holiday time can spell relief from holiday overspending—or give you the opportunity to do something out-of-the-ordinary with your money. Before you spend it all, think about how you'd like to use your holiday bonus. How you spend it may depend on your financial situation, goals and outlook for the year to come.

Here are some ideas for allocating your special funds:

1. Treat Yourself

Although you may want to think twice before spending every dollar of your holiday bonus on something frivolous for yourself, if you can swing it, consider using at least 20% of your bonus to get yourself something nice. Take your partner out to dinner. Get matching sweaters for you and your dog.

Consider investing in your career and work-life balance:

  • Improve your home office with better lighting, an ergonomic chair or fast internet.
  • Enroll in a course or register for a conference to further your career skills.
  • Fund a new wellness practice: Buy running shoes, sign up for yoga or plan a weekend away.

2. Pay Down Credit Card Debt

‘Tis the season to pay down holiday card debt—or any credit card balances you've been carrying this year. Because credit card interest costs are typically high, paying down your balance is a smart use for your bonus money. Not only can you save on future interest charges, but lowering your credit card balances will improve your credit card utilization and may help raise your credit score.

3. Add to Your Savings

After struggling with inflation all year, many people have raided their savings to cover emergencies or even regular expenses. If your savings can use a little love, consider setting aside some of your bonus money in a high-interest savings account:

  • Fund your emergency savings. Experts recommend having at least three months' worth of expenses in emergency savings.
  • Start a sinking fund (or funds). Start saving for a down payment on a car or home, or set aside regular cash for a large purchase like a sofa, a wedding or your summer vacation. Use bonus money to kick-start the savings.
  • Save for next year's holiday gifts. Alternatively, sink a few dollars into a holiday fund for next year's presents. Yes, it's early. But think about how happy you'll be to have ready cash for playing Santa next December.

4. Top Up Your Retirement

If you haven't already maxed out on your employer's retirement plan, consider making a one-time contribution now. Contributing to a traditional 401(k) will lower your taxable income and save you a few dollars at tax time, in addition to providing the long-term benefits of saving for retirement.

Already maxed out? You can contribute up to $6,000 to a traditional or Roth IRA in 2022; $6,500 in 2023, with a $1,000 catch-up contribution for taxpayers age 50 or older.

5. Start an Investment Account

Open a taxable investment account to start investing in stocks, bonds, exchange-traded funds and more. Unlike your earnings in tax-advantaged retirement accounts, the dividends and capital gains you make in a taxable account are just that—taxable. But, in the long run, investments may bring higher returns than regular savings. Enlisting help from a robo-advisor is one way to better plan your investments if your account balance isn't high enough to warrant an investment advisor.

6. Donate to Charity

Contribute to a cause that really matters to you. If you need ideas, Charity Navigator can help you find and fund charities that align with your personal mission. Charity contributions of up to 60% of your adjusted gross income are tax deductible if you itemize deductions on your federal tax return. If you don't itemize, consider the value of making a difference. Charity can be its own reward.

4 Things to Remember About Your Holiday Bonus

Holiday bonuses are a little like visits from Santa: Even when you know they're coming, it's a good idea to prepare for the unexpected. So remember the following:

  • You might not get cash. Some companies give prepaid gift cards, extra days off or actual gifts. Be appreciative, no matter what.
  • Bonuses aren't guaranteed. Unless your employment contract specifies that you'll get a holiday bonus, you may not get one every year—or you may get a different amount from year to year. Don't depend on your holiday bonus as income: Treat it like the gift it is.
  • Your bonus is taxable. Typically, taxes are withheld from holiday bonuses at the same rate they would be from your paycheck, so a $2,500 bonus won't result in a $2,500 check.
  • It's meant as a thank-you. Whether your bonus is large or small, it's a token of thanks for your hard work all year. Appreciate it—and yourself. You earned a little extra something.

The Bottom Line

One final tip: Before you decide how to deploy your holiday bonus, consider doing a financial check-up to kick off the new year. Take stock of your savings and investment balances. Total up your credit card bills. Have a look at your credit score and credit report to see whether you're on track or need to set a few goals for the new year. Your holiday bonus happens once a year, but financial wellness spreads cheer in every season.