These are the 4 things you should be doing with your annual bonus

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• Paying off debt should be your top priority if you receive a bonus.
• Plan for your future by investing in things like a retirement plan and a 529 plan for your child.
• Don’t treat your bonus like “found money,” but it’s okay to spend part of your bonus on something fun.

If you’re set to receive a bonus this year as part of your total compensation, it’s important to have an idea of ​​what you’ll do with that cash before you receive it. Whether you’re looking to make a big purchase, save for retirementor just getting by with your bills, there are a few things to keep in mind.

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1. Use your bonus to pay your debts

As a number one priority, consider whether you have unsecured debt, such as credit cards or personal loans. These types of debt tend to have higher interest rates and are a great candidate for an aggressive payment strategy that includes a portion of your bond. Otherwise, the money you pay in interest can cost you significantly more over time.

And don’t forget about any student loans you may have. Even if you are lucky enough to have had your student loan payments frozen since the start of the COVID-19 pandemic, it is important to remember that those payments will inevitably resume. Although it may not seem like it right now, it may be to your long-term advantage to reduce a portion of your principal balance now while you have the cash available to do so.

2. Save your bonus for retirement

If you don’t have unsecured debt to worry about, or if you’ve managed to pay it off and still have extra dollars to work with, the next place to look is your retirement savings accounts. In addition to the benefits of compounding returns, workplace retirement accounts provide a dollar-for-dollar reduction in taxable income on your total contribution, up to limits allowed by the IRS.

Some employers even offer the ability to make excess contributions beyond the annual maximum using after-tax dollars. And depending on your income level and seniority with the company, you may even have access to a supplemental executive retirement plan. These plans are generally contributed through payroll deduction and allow you to invest in the same mutual funds or company stocks that are available in the main retirement plan.

If you have already maxed out your 401(k) or other work retirement accountconsider contributing to a Roth or traditional IRA too. Either of these account types would allow you to build your retirement savings and put a portion of your bonus to good use. Just keep in mind that the contribution limits and the tax deduction of those contributions will be based on your overall household income, and in some cases, you could even be excluded from participating entirely.

3. Invest your bonus in your goals and in yourself

From here, it is important to consider the rest of your long-term goals and which of them is your highest priority. For example, if you’re looking to buy a new home within the next two years and already have a savings goal in mind, then that would obviously be the best use of those funds.

However, if saving enough to send your child to college is high on your list, it would be a good idea to allocate part of your bonus to a savings plan dedicated to covering these expenses. A savings plan for education 529 It can be a great college savings vehicle because earnings grow tax-free and withdrawals are tax-free when used for qualified education expenses.

If your current financial situation is strong and you have no other immediate financial needs, consider investing it. to invest it can help grow your money over time and provide long-term security, as well as supplemental income in the future. Resist the temptation to invest on an ad hoc basis. Instead of picking some hot stocks or day trading, follow a more methodical approach aimed at earning better returns than a bank account, but not so volatile that it keeps you up at night.

Instead of investing in traditional stocks and bonds, another smart way to use your bonus is to invest in yourself and your career. Consider taking classes that can help you advance professionally. This could include anything from industry-specific certifications or training to courses related to skills like public speaking or project management. Investing in yourself will not only help increase your professional value today, but investing in your career prospects now can pay off later when it comes time to negotiate for a raise or promotion.

4. You can splurge a little, but keep 10%

You might be tempted to spend your money on something fun and inconsequential, but it’s worth considering ways to get more value for those dollars. It’s important to view the bonus as part of your total compensation, rather than treating it as “found money.” You worked for it. You didn’t win the lottery.

That said, it’s just as important to treat yourself as it is to invest in your financial future. Be sure to set aside 10% of the money you receive as a bonus to buy yourself something as a reward for all your hard work and diligence. This may mean buying something you’ve been wanting for a while, like an expensive piece of jewelry or an item of clothing. It could also mean taking a weekend vacation somewhere new and exciting. This kind of self-care is important and helps ensure that you stay motivated to keep up the good work.