Don't make these 4 mistakes with your end-of-year bonus
A small windfall in the form of a holiday bonus can go a long way — if you're smart about handling it, that is. Otherwise it can be gone before you know it and without actually leaving you any better off.
Here are four of the worst things you could do with your end-of-year bonus.
Spend it all right away
While it's great 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. That could lead to lifestyle inflation, which is the natural human tendency to spend more as you earn more — and which means you can end up finding it hard to save, no matter how much you make.
Come up with a plan before buying anything. And consider the "50-30-20 percent rule" when dealing with any windfall: It suggests that 50 percent of the money goes straight to savings — into your checking account, emergency fund or a long-term savings or investment account — while 30 percent goes towards funding your lifestyle and 20 percent goes towards fun.
Spend on the wrong things
As research shows, how you spend matters — often it's even more important than how much you spend in total. Consider the 2016 study from The University of Cambridge, which compared a person's spending habits with their personality: If they matched up, they were more likely to report satisfaction. For example, when extroverts were forced to spend money at a bar, they were happier than introverts having to spend money there. Conversely, an introvert was happier to spend money at a bookshop.
The key takeaway: 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, paying for a gym membership or hiring a career or success coach.
As Warren Buffett says, "Ultimately, there's one investment that supersedes all others: Invest in yourself. Address whatever you feel your weaknesses are, and do it now."
Put off investing
A small amount of money invested earlier will earn more than a large amount of money invested later. That's because the more time your money has to work for you, the more time it has to grow, thanks to compound interest.
Rather than putting off investing for another day, take part of your bonus and put that money to work in a retirement savings account or other investment vehicle, such as a robo-advisor or low-cost index fund.
If you invest at least a chunk of it, your bonus money will continue to grow and compound over time, and your future self will thank you.
Try to show up your friends
Living up to your friends' or coworkers' standards is tempting, especially if 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.
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