Most of you guys have probably already received a bonus payment once. They can come to you in the form of tax refunds, profit sharing of your company or just as a reward for your outstanding work.
Sadly, most of those payments are just used to treat oneself and are gone immediately without any positive impact on your finances.
There is much advice out there on how to use those bonuses. But I think most of them are too idealistic and strict. Today, I want to share with you my two cents on that topic and help you how you could use your next bonus payment wisely.
1. Killing you loans
Well, that’s a pretty common suggestion on bonus payments. This money wasn’t planned in by you at all. So why not using it for some of those daunting car loan payments and reduce the time you are in debt?
Too many people are way too familiar with the feeling of living in debt! Don’t be one of them! Get rid of these loans now!
2. Short- and mid-term goals
One big part of my budgeting system is avoiding loans by saving upfront. I’m not talking about short-term goals that arose when you’ve received the bonus payment. I’m talking about things that were planned before and you want to give them some acceleration.
Let’s give you two examples of myself. I’m saving for our first car on a monthly basis and for our wedding as well. Both of those actions are already planned. However, it’s also something where people may have to take a loan to realize them. I want to avoid it and what’s better than getting rid of your loans? Right, not even having them in the first place.
3. Build that emergency fund…finally!
That’s also a pretty popular advice. But it also gives you the chance to avoid loans. An emergency fund is your backup plan if something doesn’t work as intended.
For example, I had to get a new special health insurance (it’s a must in Germany) as I am now self-employed. Before I had a student insurance but I needed to do an upgrade. Moreover, I had to do the upgrade also for the previous month and therefore had an extra 430€ to make. This 860€ overall could have easily brought me into trouble. Some people would be in the situation that they need to lend some money to cover those unexpected costs. I just took the money out of this savings account and will build it up again.
So if you have no emergency fund or it’s too small to make you sleep well at night, put your next bonus payment in this account.
Maybe the easiest way to become rich is investing early and wisely. The more you invest the higher is your return. I wouldn’t mind if I can retire 10 years sooner or having 3-4 millions when I’m retiring. I think you wouldn’t as well. Maybe these bonus payments are just a small amount. But with the power of compounding, they can have a positive impact on your investments.
Put your bonus payments into your investment accounts and you will speed up that compounding effect.
5. Have some fun
Well, this is something where I disagree with most frugal bloggers. These bonus payments are a reward. Well, even when it’s just a tax refund, it’s still a reward for handing in all of the papers. Don’t get me wrong, you should never just spend your bonus payment. No matter how much you receive use only a part of it for spending.
It’s even more important to note that you shouldn’t increase your expenses due to a bonus payment. What do I mean? Let’s say you get $1,500. So you decide to buy a new car even though you can’t afford it totally. So you make the down payment of $1,500 and use a financing that costs you another $200 per month over the next year. Now your financial situation is even worse because of a bonus payment.
There are many different options what you can do with a bonus payment. I think you should always split the money and try to divide it equally to short-, mid-, and long-term goals. Getting rid of loans is probably a mid- or long-term goal. The next vacations are usually short-term.
I would prefer to get rid of the loans and build an emergency fund first. Therefore, most of your bonus payment should be devoted to this causes. Then you can use the money for the other stuff. Using money also to buy some nice stuff can be very motivating and hence very important. Just don’t use the money for this alone.
So what do you use your bonus payments on? Do you regret how you’ve used some of your earlier bonuses? Let me know by leaving a comment below!