Did you get a little something extra in your paycheck this holiday season?
If you just received a year-end bonus, congratulations. With money tight and the economy uncertain, those extra dollars can be hard to come by. Now the question is: How do you use that hard-earned bonus wisely?
Here are eight suggestions for getting the most from your year-end bonus.
1. Treat yourself -- within reason
Splurge. Indulge. That may not be what you were expecting to read in an article on financial advice, but it is very important to get some enjoyment out of your achievements. The important thing is to set limits -- otherwise, your financial windfall may make you feel like you have a license to spend money, which can lead to burning through more than the windfall itself. Instead, budget a portion of your bonus and reward yourself with some short-term gratification. Then take the rest (ideally, the majority) of that bonus and put it to good long-term use.
2. Pay off credit cards
While interest rates generally have been falling to record levels, the Federal Reserve reports that rates on outstanding credit card balances recently reached the highest level since 2010, at 13.22 percent. As a result, using your bonus to pay off a credit card may be one of the most productive moves you can make with it.
3. Get your mortgage above water
With 30-year mortgage rates now below 3.5 percent, the only thing that has stopped some people from refinancing is that they still owe more than their homes are worth, due to the decline in housing values. However, with housing prices starting to recover somewhat, a year-end bonus might make the difference in getting your current mortgage loan above water. That, in turn, could put you in position to take advantage of some of the lowest mortgage rates on record by refinancing. Look at this as the best of both worlds -- you get to spend the money by putting it toward your home's equity, but still get some ongoing benefit from that money in the form of interest savings.
4. Max out your retirement contributions
If you haven't reached the contribution limits on tax-deferred plans such as an employer-sponsored 401(k) or a traditional IRA, then putting your bonus into one of these plans can have multiple benefits: You can defer paying taxes on the amount contributed, build your retirement savings and compound those savings with future investment earnings. If your employer makes 401(k) matching contributions, you might even be able to boost the effective size of your bonus by qualifying for that matching money.
5. Start a college savings fund
If funding a college education is in your future -- whether for yourself, your spouse or a dependent -- then contributing to a tax-advantaged college savings program such as a 529 plan might be a good use for your bonus. According to figures from The Economist, U.S. college tuition now represents 38 percent of a typical American's average annual compensation. For most people, that's too heavy a load to bear all at once, so some advance savings can make paying for education much more manageable. Not only that, but a 529 plan can allow you to take a tax deduction now and pay no tax on distributions from the plan later on -- as long as the money is used for qualified education expenses.
6. Rebalance your portfolio
As your goals, income and gains or losses change, your investment portfolio needs to be readjusted periodically. Rather than having to force security sales to make these adjustments, the most efficient way to rebalance a portfolio is to do it when introducing new money into the program.
7. Get a better savings account rate
If you are putting some of your bonus into a savings account, take the opportunity to ensure that your account is offering a competitive yield. Be sure to shop for the best rates before you settle on a new savings account, and be aware that making a larger deposit might qualify you for higher rates.
8. Eliminate checking account fees
Free checking accounts are getting harder to find, but banks generally will waive checking account fees if you meet a minimum balance requirement. The money from your year-end bonus might beef up your account enough to meet that threshold, and those savings could amount to more than you would earn in interest on the same amount of money.
A year-end bonus is your reward for 12 months of hard work. If you put that bonus to work for you wisely, you could see it continue to reward you over the next 12 months -- and beyond.