An end-of-year bonus can be significant extra cash. This year, the average anticipated holiday bonus is $1,797, according to Accounting Principals.
But if spent recklessly, a bonus can be just as dangerous as it is exciting. Here are five of the worst things you could do with the small windfall.
1. Spend it all right away
If you're not careful, your bonus can disappear in the blink of an eye. After all, as people earn more, they tend to spend more — it's called lifestyle inflation.
While it's OK to treat yourself and spend a portion of your bonus, you don't want to get in the habit of blowing through cash just because you can.
Come up with a plan before buying anything, and consider the "50-30-20 percent rule" when dealing with any windfall: Fifty percent of the money goes straight to the bank — into your checking account, emergency fund or a long-term savings account — while 30 percent goes towards funding your lifestyle, and 20 percent goes towards fun.
2. Spend on the wrong things
When you do spend your bonus, you want to do so wisely. It's tempting to try to save money by buying the cheapest version of an item, but inexpensive products can end up costing you in the long run.
Invest in things that you truly need and have value. That advice doesn't just apply to big purchases, either. Check out 18 things worth paying extra for, which range from a coffee maker to a well-made suit.
3. Save investing for another day
While it's tempting to head straight to the mall as soon as your bonus clears, remember to pay yourself first. In other words, take part of your earnings and put it to work in a retirement savings account or other investment vehicle, such as a robo-advisor or low-cost index fund.
If you pay yourself first, your future self will thank you. After all, financial experts say it's the "one, proven, easy way to get rich."
4. Assume if you maxed out your 401(k), you're set
If you've already maxed out your employer's 401(k) plan, you're well on your way to a secure retirement, but don't stop there. While it's a great start, experts say that relying on just your employer's retirement plan may not be enough to fund your future.
Before splurging on a new pair of shoes, consider directing a portion of your extra money towards an alternate retirement savings account, such as a Roth IRA, traditional IRA and/or health savings account.
Bonus points if you set up automatic contributions so your account continues to grow over time.
5. Try to show up your friends
Living up to your friends' or coworkers' standards is tempting, especially if you just got a sweet bonus. But if you make a habit out of choosing where to eat, what to wear, and what gadgets to buy based on what your friends do, you can end up wrecking your budget … and blowing through your bonus.
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