5 Tips to Help Better Manage Your Christmas Bonus
Being strategic about your Christmas bonus can put you in a much better financial position.
Contributing Writer at Tally
August 31, 2021
A recent study found that only 19% of employers indicated that they would not offer a bonus during the holiday season. If you're the fortunate majority 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 is 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 bonus payment. In this article, we go through five ways that you can better manage your year-end bonus for financial success.
1. Knowing what type of bonus you're receiving
Knowing what kind of bonus you will receive is the first step in determining how you spend it. There are two types of bonuses: discretionary and non-discretionary.
A discretionary bonus is given completely at the employer's will. There is no requirement to give one, and there’s no guarantee you’ll receive one as an employee. These bonuses are typically not announced in advance, so there is no way to plan for them properly.
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, they’ll receive the bonus on top of their base salary. 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 a challenge to plan for the bonus. Typically you’re unaware of how much it will be if you receive one at all.
On the other hand, if you have a non-discretionary bonus, it's much easier for you to predict that money at the end of the year. 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.
2. Planning for the taxes you'll pay
You may know what your standard federal income tax rate is on your annual salary. However, your bonus is not taxed at the same rate. Instead, a bonus is taxed 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 per year, your federal income tax rate is 12%. So, you'll be paying more in 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.
3. Paying down debt
Splurging on a purchase or going on a New Year's trip is undoubtedly the more fun way to spend your bonus. However, if you’re in debt, it's probably not the savviest financial decision.
A bonus can provide you an opportunity to make headway in paying down debt. You're essentially 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. If you’re unable to pay your statement balance in full by the due date, your interest figure can escalate quickly.
Using your bonus to pay down more of your debt balance could reduce your interest figure. This, in turn, could save you hundreds, if not thousands of dollars in the long run.
One option to make debt management even simpler 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 credit1.
And, because Tally pays down your debt faster, you'll be able to start saving money and working toward achieving your financial goals sooner.
4. Investing your Christmas bonus
Once you have paid down debt, you can start working to build more wealth. If you are debt-free, consider investing any remaining money from your holiday bonus.
Let's say, for instance, that you put $1,000 of your bonus into an investment fund each year for 30 years and earn an average of 6% per year on the investment. By the end of year 30, you'll have contributed $30,000, but your future value will be 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 better work 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. If you invest, a trusted advisor can select an investment portfolio that best matches your financial goals.
5. Starting 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 get started.
For example, let's say that you want to get into data entry but need a personal computer and monitors to do so. You can use your Christmas bonus to purchase this 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 even further.
Know how your Christmas bonus works to manage your finances
Receiving a Christmas bonus may be a welcome surprise. Because this was likely money you weren't initially expecting, you may be tempted to splurge and treat yourself. However, this is not necessarily the wisest way to manage your bonus.
There are a few tips to consider when it comes to managing your bonus. Try to determine how much you'll be receiving and the estimated tax payment. Then, use your bonus to pay down existing credit card debt. Consider using an app like Tally to help jump-start this and make the process even more efficient.
Once you have paid down debt, you can build your investment portfolio or start a side hustle, both of which can help you earn even more money in the future.
1To 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% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.