Don't make these 3 mistakes with your end-of-year bonus

Marco Bertoli | Twenty20

If you're on the receiving end of a holiday bonus this year, it's OK to treat yourself and spend some of it on something you want. But before you go blow the whole thing, take a few minutes to consider the smartest way to spend the extra cash.

Here are mistakes to avoid when your bonus lands in your bank account.

Trying to show up your friends

Living up to your friends' or coworkers' standards is tempting, especially when you're feeling flush. 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.

Before you spend anything, come up with a plan. Try a twist of the "50-30-20 rule" when dealing with any windfall: Put 50% of the money straight to savings, perhaps in an emergency fund or a long-term savings or investment account. Use 30% to fund your lifestyle and the last 20% can go toward something fun.

If you're paying off debt, another option is to use 80% of the bonus to make an extra payment on your student loans or outstanding credit card balance and the remaining 20% on something for yourself, like a nice dinner out or a new pair of shoes. With this method, you get both immediate gratification of spending some on yourself and the long-term benefits of paying off more of your debt.

Spending it on the wrong things

How you spend matters — it can even be more important than how much you spend in total. To get the most out of your money, spend on things or experiences you actually enjoy that will add value to your life.

On that note, consider investing in yourself, whether that means taking a class in order to develop a specific skill, buying books in subjects that interest you or hiring a career or success coach. A handful of self-made millionaires and billionaires agree that investing in yourself is the best investment you can make.

Warren Buffett's secret to investing lays in the game of baseball
Warren Buffett's secret to investing lays in the game of baseball

Investing it in the wrong places

It's smart to put your bonus money to work, but buying individual stocks or investing it all in high risk investments like cryptocurrency isn't the best way to go.

Instead, try index funds, which are lower risk and lower cost than buying individual stocks.

"The trick is not to pick the right company," says legendary investor Warren Buffett. "The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently."

Don't miss: The 5 smartest things to do with your end-of-year bonus

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