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A Reddit poster recently asked how others plan to spend bonuses from work. Will they save the money? Or will they splurge?
The responses were as varied as Reddit users themselves. Some said they’d save, pay off student loans or take care of auto debt. Others mentioned splurging on something a little “extra” like a luxury scarf or hair styling appliance.
Some respondents even shared percentage-based formulas for allocating bonuses to a mix of savings, debt and fun spending.
That’s the kind of nuanced prioritization the financial experts I spoke with encouraged.
“The first question should be, ‘Where are you in your bills, your savings?’ After that, it’s fun,” says Kelly Gilbert, fiduciary advisor and owner of EFG Financial, a firm in Grand Rapids, Michigan.
But there’s a lot of advice that fits in between, especially because bonuses can differ from other types of windfalls. They’re often expected around the same time each year — but they’re not guaranteed.
How you spend your bonus is up to you, but here’s what to consider when you get one.
Pay off high-interest debt and beef up savings
Gilbert says high-interest debt (e.g., from credit cards) should be a top priority. “Get rid of that unsecured debt — that’s a great investment,” he says.
Also at the top of the list? Saving.
“I love to see people build or reinforce their safety net. If you don’t have two, four or six months’ worth of expenses in place, a bonus can help jump-start that,” says Skip Skolnik, senior planner and founder at Skolnik Retirement Solutions in Amherst, Ohio.
If you already have an emergency fund in place, then Skolnik suggests adding to it or earmarking funds for upcoming expenses such as a home renovation.
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Invest in yourself
After taking care of high-interest debt and shoring up savings, Gilbert urges people to put money into self-improvement.
That could be a new training or certification to advance your career. It could also include personal coaching or some other kind of life or career enhancement. Perhaps a gym membership or mental health therapy makes sense.
“Always invest in yourself,” he says. A bonus is a particularly good tool for self-investment since you earned it from your hard work.
Splurge a little
Next, allow yourself to have a little fun, Gilbert says. He adds that it’s OK to allot some of the bonus to a splurge, as long as you’ve already taken a close look at those other priorities first.
“I have no problem with people spending money, as long as it’s intentional,” Skolnik says. In fact, he has a formula for bonus allocation: Take 50% and invest it in your future through a savings or investment account, use 30% to pay off high-interest debt and use 20% to have some fun.
That breakdown echoes the 50/30/20 budget, where consumers spend 50% of their take-home pay on needs, 30% on wants and 20% on savings and debt payments.
Skolnik cautions against allowing a bonus to lead to lifestyle creep — where your expenses follow your income trend — especially if a bonus isn’t guaranteed.
Also, he says to think hard before going after the new car or boat, which will come with ongoing costs.
Plan ahead
Taxes may not be withheld on bonuses at the same rate as the rest of your income, and if that’s the case, you may need to set money aside to cover a surprise bill when taxes are due. That’s one reason bonuses can differ from other types of windfalls.
“Some people don’t worry about taxation and hope for the best, but hope is not a strategy,” Gilbert says.
If a bonus is a regular and recurring thing, be ready for it. “I would suggest creating a plan before that bonus shows up,” he says.
That way, when it does, you already know how to apply it in meaningful ways, versus using it impulsively.
“You’re ready for it and you know what to do,” he adds.
Reddit is an online forum where users share their thoughts in “threads” on various topics. The popular site includes plenty of discussion on financial subjects like how to spend bonuses, so we sifted through Reddit forums to get a pulse check. People post anonymously, so we cannot confirm their individual experiences or circumstances.
