4 Wise Ways to Spend Your Christmas Bonus
Being strategic about your Christmas bonus can put you in a much better financial position.
Contributing Writer at Tally
November 13, 2022
A recent study found that only 23% of employers said they are offering a performance-based bonus during the holiday season. If you're one of the fortunate employees receiving a Christmas bonus at the end of the year, you may be tempted to splurge and buy yourself something you've long been eyeing.
Perhaps there’s a new car you've been considering or a family vacation you'd like to take. You've put in a lot of hard work to receive your holiday bonus — shouldn't you treat yourself?
While these ideas are fun and tempting, they may not be the best way to spend your employee bonus payment. In this article, we go through four ways to spend your year-end bonus wisely and some other things to consider, like taxes, when you’re expecting a bonus.
4 ways to use a Christmas bonus
You can do plenty with your Christmas bonus, ranging from saving it to spending it on the new television you’ve been eyeballing. However, you could also exercise good financial decision-making with one of these four options.
1. Build an emergency fund
An emergency fund is a springboard to financial security. This fund, which should be three to six months’ worth of expenses, helps protect you if you lose your job, see a sudden reduction in pay or if a costly emergency strikes.
Your Christmas bonus may not be enough to cover the full fund, but it’ll give you a solid start you can build upon or give your existing emergency fund a healthy boost.
2. Pay down debt
Splurging on a purchase or going on a New Year's trip is a fun way to spend your bonus. However, if you’re in debt, it's probably not the savviest financial decision.
A bonus can allow you to make headway in paying down debt. You're receiving a lump sum of money that is otherwise not a part of your annual salary or budget.
Your money could go even further if you use your cash bonus to pay down credit card debt. Credit cards have high annual percentage rates and compounding interest. Meaning interest charges can add up quickly and cause your balance to grow.
Using your extra cash to pay down more of your debt balance could reduce your interest charges. This, in turn, could save you hundreds, if not thousands of dollars in the long run.
One option to simplify debt management is to consider an app like Tally. Tally† is a credit card payoff app that automatically pays down your balances efficiently using a lower-interest line of credit.
And because Tally pays down your debt faster, you'll be able to start saving money and working towards achieving your financial goals sooner.
3. Invest your Christmas bonus
Once you have paid down debt, you can start working to build more wealth. If you’re debt-free, consider investing any remaining money from your holiday bonus.
Let's say, for instance, that you put $1,000 of your bonus amount into an investment fund annually for 30 years and earn an average of 6% per year on the investment. After year 30, you'll have contributed $30,000, but you’ll have approximately $85,000. You more than doubled your principal investment.
Investing comes with risk but can be a way to build wealth by working smarter, not harder. Using your Christmas bonus to jump-start your investments is one strategy to help your money work better for you.
However, it’s important to note that everyone’s financial situation is unique. Speaking with a financial advisor will ultimately help determine the right choice for you. A trusted advisor can select an investment portfolio that matches your financial goals and risk tolerance.
4. Start a side gig
Another way to help your bonus go further is by starting a side gig. More Americans than ever before are working a side hustle to secure supplemental income. The Christmas bonus from your full-time job can provide you with the initial capital you need to start.
For example, you want to do data entry on the side, but you need a personal computer and monitors. You can use your Christmas bonus to purchase the equipment. This, in turn, allows you to start earning money through your side hustle.
Another way you could use your bonus would be to enroll in online courses that provide you with the technical skills or certifications needed for your side gig. Using your bonus money to invest in your future is an easy way to stretch your newfound cash further.
Things to consider when getting a Christmas bonus
When receiving a year-end or Christmas bonus, you should consider a couple things before you make plans to spend it.
Know what type of bonus you're receiving
Companies offer different types of bonuses, and knowing what kind you’ll receive is the first step in determining how you’ll spend it. There are two types of bonuses: discretionary and non-discretionary.
A discretionary bonus is given completely at the employer's will based on company performance, employee performance reviews or a combination of both. There is no requirement to give one, and there’s no guarantee you’ll receive one as an employee.
A non-discretionary bonus is the opposite. A non-discretionary bonus is included in the employee's contract. There may be stipulations that come with this annual bonus, but as long as an employee meets the criteria stated in the employment contract, the company will pay the bonus on top of the employee’s salary during the Christmas season. There may be some eligibility requirements, such as being a full-time employee instead of part-time or a certain number of years of service.
If you have a discretionary bonus structure, it may be challenging to plan for the bonus. Typically, you don’t know in advance how much the bonus will be or if you’ll receive one at all.
On the other hand, if you have a non-discretionary bonus, it's much easier to predict that money on top of your regular paycheck. You can build these funds into your Christmas budget to avoid holiday debt or earmark the money for another use, like paying down existing credit card debt or investing.
Plan for the taxes you'll pay
Unfortunately, bonuses aren’t tax-free. You may know your standard federal income tax rate on your base pay, but the IRS doesn’t tax your bonus at the same rate. Instead, the IRS taxes a bonus at a flat rate of 22%. This is known as the supplemental income tax rate.
This could be higher or lower than your standard tax rate. For instance, if you earn $40,000 annually, your federal income tax rate is 12%. So, you'll be paying more taxes on your bonus than you're accustomed to. You may owe additional state taxes on your bonus income as well.
You should also pay attention to how your employer handles the taxes on your bonus. Some employers will automatically withhold taxes. Others will not withhold taxes, which means you'll owe money to the IRS when you file your tax return the following year.
If your employer does not withhold taxes, consider setting aside 22% of the bonus in a separate account so you have the money to pay these taxes when you file your return in the spring.
Spend your Christmas bonus the best way possible
Receiving a Christmas bonus may be a welcome surprise. It’s likely money you weren't initially expecting, so you may be tempted to splurge and treat yourself. However, this is not necessarily the wisest way to manage your bonus.
Instead of splurging, look into more financially sound ways to use it, such as paying down debt, building an emergency fund, investing it or using it to kick off your side gig. No matter which you choose, this will help put you on a path toward solid money management.
If credit card debt is eating up a large portion of your bonus, consider using an app like Tally†. Our app helps you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.