If you are looking for ways to improve your finances, you may already have been handed the ability to do that.
The holidays are over and if there is one good thing that we got, it is our holiday bonus. For some people, this bonus came in early – around Thanksgiving. This allowed them to factor in the bonus into their holiday shopping. Some employers prolonged the excitement by giving the bonus on the last workday before Christmas. Others wait until after their workers come back from the holiday vacation before handing out the bonuses.
Regardless of when you receive your holiday bonus, you need to consider carefully how you should use it. This is one of the financial windfalls that you can use to improve your finances this 2016.
According to an article published on USNews.com, the year-end bonus is given as a reward for hardworking Americans. It is also meant to boost the morale of the employees. This will put them in high spirits going into the new year and hopefully, make them more motivated and productive. It may cost the employers a good amount of money but if it makes the employees more productive, that can translate into a more profitable business.
The same articl
e also revealed the results of the survey done by a consultancy firm Challenger, Gray & Christmas, Inc. According to the survey, 80% of the employer respondents said that they planned to give their employees a year-end bonus – of sorts. We all know that bonuses can come in many forms: cash, pay raise, paid vacation leaves, etc. If you got a cash bonus for the holidays, then you know that this can be used to capitalize on your financial growth this year.
3 smart financial choices for your holiday bonus
Increasing your net worth is not as easy as you think. At least, this is true if you do not have the determination to do it. There are so many temptations to fight so you will not spend your money on unnecessary expenses. You will primarily be fighting your own urges – and we all know that is a battle that a lot of us have difficulty with. You need to exert total self-control and discipline so you can improve your finances.
When it comes to your holiday bonus, the temptation to spend it will be very high. After all, it is given during the gift-giving season. We are all in high spirits and that makes our spending judgement quite clouded. Admittedly, that would make it very difficult to decide how you will spend this financial windfall.
If you want to put this money to good use, there are three important ways that you can use it to improve your finances.
Add it to your retirement savings.
The first option is to use it to fund your retirement savings. If you have not reached the maximum limit of your annual contributions, you are highly encouraged to put your holiday bonus in your retirement funds. This will help increase your savings towards that account. Since it is usually used to invest, you can count on compound interest to grow that money exponentially.
Pay off your credit card debts.
Another way for you to use your holiday bonus is to pay off your high-interest debts. Usually, these are your credit card debts. You have to understand that carrying over a balance to the next month is never a good idea. You are wasting money by paying finance charges. If you want to be smart with your credit card use, you need to pay your balance in full. According to an article from CNN.com, the Federal Reserve is expected to raise the interest rates this year. If that happens, you can expect that your credit card interest will follow suit. If your bonus is not enough to pay off your full balance, you can enrol in a debt settlement program. This is a debt relief program that involves negotiating your debt with the creditor. You will promise to pay them a lump sum as long as they agree to forgive the rest of the amount that will not be covered by that amount. You can talk to a National Debt Relief representative to know more about this debt solution.
Invest in yourself.
Finally, a smart way to use your holiday bonus is to invest in yourself. While this is another expense, it can still help improve your finances as long as it is used to increase your ability to earn more. You can use it to finance your education so you will have the ability to earn more. If you think that a vacation will help you be more productive, that is also something that you can do – as long as you really believe it will help you function better. You can even use it to start your own passive income. Anything that will allow you to earn more cash each month.
Take note that you do not have to do all three. You can choose just one of these and it should be enough to improve your finances. However, tapping into two or more should diversify and secure your chances of increasing your net worth this 2016.
How to handle a financial windfall
A financial windfall is any amount that you get unexpectedly. In most cases, this is a cash gift, inheritance or a winning that you get in huge sums. A holiday bonus may not be completely unexpected but most people do not include it in their usual budget – which makes it a happy addition to anyone’s finances regardless if it is expected or not.
As mentioned, when we are happy, we usually become reckless when it comes to spending this financial windfall. According to CommonWealth.com, 7 out of 10 Americans who got a windfall usually lose it within a couple of years. This is based on the data gathered by the National Endowment for Financial Education. While this may be referring to the huge windfalls like an inheritance or lottery money, the same can be assumed with your holiday bonus. This is why you need to exert self-control before you spend that money on something that is completely unnecessary.
Before you think about spending that financial windfall, ask yourself these questions:
- What are your saving targets? Check out your savings first. If you are saving up for a down payment of a house or you need to increase your emergency fund, then your windfall could boost these funds so you can reach your target faster.
- What are my debt obligations? Another question that you need to ask involves your debts. If you have some debts, you need to consider paying them off. At least, this is true for those that will not charge you with prepayment penalties. It is important that you check your obligations before spending the windfall on something else.
- What are my financial goals? Finally, you need to think about all your financial goals. If your windfall can be used to help you accomplish your goals faster, then make sure you choose to do the right thing.
Once you have gone through all these questions, that is the only time that you should think about your reward. Going through the questions will allow you to make a smart choice when it comes to the amount that you will use to reward yourself for the holiday bonus. Make sure you give yourself a realistic reward that will not splurge your money and leave a lot for your financial priorities.
Take note that these tips can be used for any financial windfall that you will receive – including your tax refund. An increase in your monthly cash flow is great but you have to make sure that the effect of the increase in your life will only be a positive one.
