The 8 smartest things to do with your end-of-year bonus

The smartest and dumbest things to do with your end-of-year bonus

If you're on the receiving end of a holiday bonus this year, feel free to treat yourself. You've earned it. But resist the temptation to blow your entire check on something fun. Excessive spending isn't the smartest way to handle your bonus.

Here are eight options that will be better in the long run and could feel good today, too.

Beef up your 401(k)

Ideally you're already putting money into your 401(k) retirement account if you have the option, but, if possible, you also want to get in the habit of increasing your contributions consistently. A bonus is a great opportunity.

Invest in another retirement savings account

Enrolling in your employer's 401(k) plan is a good start, but it's smart to consider alternate retirement savings accounts too, such as a Roth IRA, a traditional IRA and/or a health savings accounts (HSA). It might be worth directing some of your extra money towards one of those options.

Bonus points if you set up automatic contributions so your account continues to grow over time.

Caveats: While anyone can contribute to a traditional IRA, your income may disqualify you from the tax benefits. If you contribute to an employer-sponsored retirement plan and your income exceeds certain levels, the amount you can deduct may be limited. And if you're interested in contributing to an HSA, keep in mind that you have to have a high-deductible health care plan (HDHP).

The definitive guide to retirement savings plans

Build an emergency fund

Only 47 percent of Americans are prepared for an emergency, and 60 percent of millennials couldn't cope with a $1,000 crisis.

Experts agree that it's smart to have three-to-six months' worth of savings tucked away, or even more, to help protect you in case of disaster. If you're not there yet, use at least part of your bonus to prepare for a rainy day.

Pay off any lingering debt

If you have student loans, car loans or credit card debt, a bonus can be a great way to get out of the red more quickly. Especially if the interest rate on your debt is high, getting rid of your loans as fast as possible will help you avoid having to pay thousands of dollars extra.

Money expert David Bach: Here’s how much you should have in your emergency fund

Chip away at larger savings goals

Chances are, big purchases are in your future, such as a home, car, grad school or education for your kids. Use at least some of the extra money to get a head start on saving. Months or years from now, you'll be glad you did.

Consider other investment vehicles

Investing is one of the most effective ways to build wealth, and an unexpected bonus could be a good opportunity to get started.

Look into automated investing services known as robo-advisors, some of which have been shown to outperform actively managed funds and even index funds. That said, low-cost index funds, which investing legend Warren Buffett and billionaire Mark Cuban both recommend, are also a smart bet.

Invest in yourself

One of the best investments you can make is in yourself. Take a chunk of your bonus and use it to further your education by enrolling in a course, attending a business conference or investing in books.

That can also mean investing in your health. Consider making room in your budget for a gym membership, exercise classes or a fitness-magazine subscription. Whatever helps you take care of yourself in the long term.

Give back

Try donating a portion of your windfall to a cause you believe in. Besides helping others in need, you may find that it boosts your mood and overall life satisfaction.

Before giving away any money, do your research on the organization you're interested in contributing to and read up on tax-friendly ways to donate.

Don't miss: Kevin O'Leary: Making this New Year's resolution is the best thing you can do for your future

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Here are the 3 smartest things to do with an extra $1,000
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