Seven Ways Financially Smart People Spend Their Annual Bonus 

Going on a spending spree during the holidays can be tempting once you receive your annual bonus. This is because it's easy to treat this hard-earned money as a windfall and not feel guilty when wasting it. They are smart things you can spend your bonus on so that they can serve you and your goals in the long run.

Saving or investing your bonus has multiple benefits. It can take you a step closer to achieving your goals, keep you financially stable going into the new year and help you build good money habits. By postponing your gratifications, you will be able to get more out of your money.

This article will explore seven smart ways to spend your annual bonus this year to ensure that you reap its benefits in 2023 and beyond. Read on.

Read Also: 10 Inexpensive But Thoughtful Gifts For Your Loved Ones

Pay Off a Debt

Debt can have significant effects on your finances and your mental health. It can prevent you from saving or investing and can be stressful. Some types of debts, like consumer loans, can prevent or delay you from accomplishing your goals and are expensive to service. 

If your primary goal this year or next is to reduce your debt burden, you should use your annual bonus to do that. This is specifically important for one reason; interest rates are rising. If the type of interest your creditor offered you isn't fixed, you'll be paying more for your loans in 2023. This rate increase can make it harder to meet your obligations, strain your budget and put you at risk of default.

Reducing your good debts also has its advantages. For example, if you have a mortgage loan, using your annual bonus to lower it will increase your home equity. This will increase your net worth and save you from paying too much interest in the long term.

Read Also: 8 Easy Ways to Pay Off Your Debt Faster

Save it for Emergencies 

Before considering spending your annual bonus on vacation, you should look at your emergency fund. Is it large enough to cover at least six months of expenses? 

With the year ending, you may have had to dig into your emergency fund a few times. Maybe you ran a budget deficit or had an unexpected expense like medical bills. Getting your rainy day fund back to its original form can be daunting as you will have to find ways to cut costs and revamp your budget. But with your bonus, you can skip all that and top it up using your newfound fortune.

Maintaining a solid emergency fund will ensure you don’t have to worry about unpredictable expenses. You will be more confident when investing in illiquid instruments or risky long-term vehicles. This will enable you to progress toward achieving your goals and help you get the best out of your investment.

Read Also: Six Simple Ways to Jump-start Your Emergency Fund

Contribute it to your retirement fund

What is better than spending your annual bonus today? Spending it tomorrow. The truth is one day, you will have to hang your boots and retire, and when that happens, you won’t be able to receive any bonus. But you will have to generate income and pay your bills. Contributing your bonus to your retirement funds allows you to grow and spend it when you need it the most. 

Thanks to compound interest, the best way to get the most out of your annual bonus is to save it for retirement. Since it is a long-term goal, you can grow it exponentially. 

If you haven’t started planning for retirement, your annual lump sum bonus can help you begin the process. You can do that in different ways, from opening an individual pension plan to creating a retirement investment portfolio. All this will help you save, grow your money and generate income in your sunset years.

Read Also: 6 Reasons Why Lack of Early Retirement Planning Can Lead to Financial Instability 

Invest in Yourself

Splurging your money on consumer products will give you instant gratifications, but when you use that money to invest in yourself, the benefits will be tenfold better. Self-investment is the best type of investment for many reasons. It can improve your productivity, skills, career prospects, and income and earn you an even bigger bonus.

They’re various ways you can invest in yourself using your annual bonus: 

Take a short course: There are many online platforms and education centres where you can take a short course and get certified. This can help you refresh and strengthen your skills and keep you up to date with emerging trends in your profession.

Learn New Skills: Learning new skills can help you perform better in your career. For example, improving your leadership skills by learning soft skills such as interpersonal and communication can qualify for a promotion. Learning hard skills can help you start your own business, create new income streams, or get a second part-time job.

Upgrade your Necessities: You can invest in yourself while also splurging. Use your bonus to buy things that can help you earn more or make you more productive. Maybe your laptop needs an upgrade? Or do you bring work home and need a home office?

Read Also: 5 Things to Do When You Get a Salary Raise

Pay your annual insurance coverage 

Insurance is one of the best ways to protect yourself, your family, and your properties from unforeseen circumstances. Insurance can save you from spending much money out of pocket and even going into debt. It helps you transfer risk to your insurers. Your car got vandalised? You can claim auto insurance, and your insurer will pay for the repairs.

Paying insurance premiums annually instead of monthly can be cheaper and gives you peace of mind as you don't have to worry about forgetting. 

Some of the most vital insurance covers you can pay for using your annual bonus include:

1. Health insurance 
2. Income protection insurance 
3. Disabilities insurance 
4. Homeowners/renters insurance 
5. Education insurance for your children 
6. Life insurance 
7. Auto insurance 

Invest in a Short-term goal

Are you planning any major purchases or life-changing events in 2023? You can kick start saving for such goals using your annual bonus.

Take the case of the Owinos, a city couple who got married earlier this year. They're planning to have their first child in 2023. They're a two-income household, and both received annual bonuses totalling Ksh85,000. They put this money aside to start their newborn expenses savings. 

Whatever your short-term goals are next year, whether it's buying a washing machine or moving to a bigger house, you can start saving for it using your bonus. You'll be able to avoid surprises and stay motivated. Additionally, you can invest this money in liquid instruments and grow it.

Read Also: Planning for Big Purchases: All You Need to Know

Pay your January Bills 

The December holidays come with a lot of spending, and it is easier to lose track and overspend. You might have to travel, buy gifts for loved ones, and participate in all those festive activities. And as you well know, they are not cheap.

Many people usually receive their December salary early, which comes with the annual bonus. If you are one of those people, you know how careful you must be to ensure you have money left to pay rent in January. If you plan to participate in all those holiday activities, you should set your bonus aside and use it in case you run out of money.

This strategy works best for people who did plan for the holiday but can't miss it. A best practice could be to always save for the holiday in advance and use your bonus in ways that can help you in the long term. Additionally, you should remember a bonus is not an invitation to blow your December or holiday budget. 

Read Also: 10 Tips to Survive the Holidays if You Have no Money

WRAPPING UP

Your annual bonus provides a great opportunity to celebrate your successes and invest in your future. Make sure to strike a balance and make smart decisions with your money. This can help you reach your financial goals and provide financial security down the road.

Remember to spend within your means and not overdo it. Consider treating yourself to something special, but make sure to save a portion of your bonus for the future. Additionally, consider donating a part of your bonus to a charity or cause you care about. This can be a fulfilling way to give back and positively impact your community. 

Finally, you should avoid making impulsive decisions. Once you get your bonus, think about the most important thing you need for a few days. Determine how best you can use your bonus and let self-rewarding be the last thing on your list.