Do you receive a year-end bonus? Lucky you! While you may be tempted to go on a shopping spree or take your gang out to a great dinner, hold on a second. Yes, you can use some of that money for fun, but you might also want to put some of a year-end bonus toward your financial goals.
Smart bonus money moves may include paying down debt, helping to fund a short-term savings goal (such as a down payment on a house or establishing an emergency fund), as well as investing the money to potentially achieve long-term growth.
There’s no one right formula for spending (or not spending) a bonus, but here are some ideas for using your bonus — or any other infusion of cash — that can help improve your financial wellness today and tomorrow.
Key Points
• Consider allocating 10% of a year-end bonus to fun, and 90% to financial goals.
• You might use some or all of a bonus to pay down expensive credit card debt — this can save you a significant amount of interest over time.
• If you don’t have a solid emergency savings fund, it’s a good idea to use some of your bonus to beef up your financial cushion.
• You might put part of all of your bonus toward a short-term savings goal like a down payment on a home or a vacation.
• Another good way to spend a bonus is to invest in long-term goals such as retirement or college savings.
Allocating Some Money to Fun
You worked hard all year. So it’s totally understandable if you want to put some of your bonus money simply towards a few wants vs. just needs.
With any financial decision, it typically doesn’t have to be all or nothing, and that includes your work bonus. In fact, taking a balanced approach to your money might actually help you to maintain the stamina that financial goals often require.
Although the exact split is ultimately up to you, to avoid overspending, you might want to consider putting roughly 90% of your bonus towards your financial goals, and devoting about 10% to “fun money.”
If you’re getting a $5,000 bonus (after taxes), for example, that means you would have $500 to spend treating yourself. The other $4,500 would then go towards putting a big dent in your money goals.
💡 Quick Tip: Your money deserves a higher rate. You earned it! Consider opening a high-yield checking account online and earn 0.50% APY.
Chipping Away at Debt
If you have debt — whether from a student loan, car loan, or credit card debt — a bonus can be a great way to start whittling away at whatever balance you have to contend with, or even wiping it out completely.
Doing this can help you avoid throwing more money away just on interest charges, and if you manage to wipe out debt completely, you’ll have one less financial responsibility to stress about every month.
How much of your recent influx of cash should be directed toward debt reduction is entirely personal, and will depend on your situation. Some financial planners recommend that people with high-interest debt consider putting around half of their annual bonuses toward paying down that debt. But this decision will depend on your individual circumstances.
Since credit card debt typically costs the most in interest, that can be a great place to start. The average annual percentage rate (APR) for credit cards was 28.70% as of March 2025. So if your goal is to make your money work for you, it may be smart to minimize credit card balances or, even better, pay them off completely. It would be unreasonable to expect that you could out-invest what you are paying out in credit card interest.
Saving for a Short-Term Goal
If you haven’t yet started, or haven’t quite finished, creating an emergency fund, getting a bonus can be a great time to beef up that financial cushion.
While many people don’t like to think about the possibility of their car breaking down, a medical emergency, or job loss, should one of these unexpected events occur, it could quickly put you in a difficult financial situation. Without back-up, you might have to rely on credit cards or high-interset loans to get by.
How much to sock away for a rainy day is highly personal. But a common rule of thumb is to create an emergency fund that has enough money to cover at least three to six months of living expenses. You may need more or less, depending on your situation.
If you already have a decent cash cushion, you may next want to think about what large purchases you are hoping to make in the not-too-distant future, say, the next few months or years. This could be a down payment on a home, a renovation project, taking a special family vacation, buying a new car, or any financial step that requires a large infusion of cash. Then consider using at least some of your bonus check to jump start these savings goals, or add to previously established ones.
It’s a good idea to put money you are saving for a short-term goal (whether it’s a down payment or an emergency fund) in an account that is safe, earns interest, and will allow you to access it when you need it.
Some options include a savings account at a traditional bank, an online savings account, or a certificate of deposit (CD). Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period of time.
💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
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Invest for the Future
Bonus money can also help you start investing in longer-term goals, such as retirement or paying for a child’s education. Using bonus money to buy investments can help you build wealth over time.
For example, a lump sum of cash can work wonders in boosting your retirement savings. Even if you’re technically on track for retirement, adding more money to your individual retirement account (IRA) or 401(k) today can leave you with a larger income stream when you’re older. If you’re already contributing to these accounts, be aware that 401(k)s and IRAs come with annual contribution limits.
You can contribute to your retirement using your bonus in a couple of ways. Many companies will automatically deduct from your bonus for your 401(k) at the same rate as usual. You can also ask your company in advance if you can have a special withholding for your bonus. You may be able to fill out a form (or go onto the company portal) to designate up to 100% of your bonus to your 401(k).
If you can’t direct that money to your 401(k), and you’re eligible for an IRA, consider maxing that out instead. Either one can help get you closer to a great retirement — and may also help you save significantly on taxes in the short term.
People who have kids may want to consider putting some bonus money toward starting, or adding to, a college savings account, such as a 529 plan (which in some states can offer tax benefits).
For financial goals outside of retirement, you may want to look into opening a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but is much more flexible in terms of when the money can be accessed.
How much of your bonus you should put towards long-term investments is an individual decision that will depend on your current financial circumstances.
Recommended: Investment Portfolio vs Savings Account
The Takeaway
No matter the size of your hard-earned bonus, it’s a good idea to think about how it can best serve you and your goals in both the short and long term. Some smart ways to use bonus money include getting ahead of high-interest debt, setting up or enlarging your emergency fund, saving up for a large purchase (such as a home), as well as beefing up retirement savings and other long-term investments. You can also mix and match smart spending, saving, and investing to fit your financial situation.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How much of your bonus should you spend?
A good rule of thumb is to spend no more than 10% to 25% of your bonus on discretionary items, like treating yourself or loved ones. Consider putting the rest towards financial goals such as saving, investing, or paying off debt. This balanced approach lets you enjoy the reward while also using it to build long-term security.
Should I use my bonus to pay off debt?
Yes, using your bonus to pay off high-interest debt (like credit cards) can be a smart financial move. It reduces the amount you’ll pay in interest over time and can have a positive impact on your credit profile. You might prioritize debts with the highest interest rates first. If your debt is management or low-interest, consider splitting your bonus between debt payments, savings, and investments. This approach helps reduce financial stress while also strengthening your overall financial health.
Are year-end bonuses taxed?
Yes, year-end bonuses are taxed as supplemental income by the internal revenue service (IRS). If your bonus is included in your regular pay, it will likely be subject to standard payroll withholding. If it’s issued as a standalone check, on the other hand, it may be subject to a flat federal withholding rate of 22%.
However your bonus is taxed, your total tax liability may change depending on your annual income and tax bracket, so you could owe more (or get a refund) at tax time.
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