What to Do With a Bonus or Raise: Spend, Save, or Invest?

Getting a bonus or raise is exciting, and it’s natural to think about the possibilities. Maybe you’ve had your eye on a big purchase, or perhaps you can’t wait to boost your savings or tackle debt. But before celebrating too hard, take a moment to make a plan. How you use this extra income can significantly impact your financial future.

This guide will help you approach your bonus or raise wisely. By finding the right balance among spending, saving, and investing, you can enjoy your windfall while still making meaningful progress toward your financial goals.

Step 1. Pause and Plan

The temptation to spend your bonus or raise immediately is strong. A great way to combat this is to pause and evaluate where you stand financially. Ask yourself these important questions:

• Do I have high-interest debt that’s weighing me down?
• Is my emergency fund sufficient to cover at least 3-6 months of expenses?
• What are my long-term financial goals, and am I making progress toward them?

Taking a measured approach allows you to make intentional decisions rather than impulsive ones. Once you’ve assessed your situation, you can allocate your new income to areas that truly improve your financial well-being.

Step 2. Start With the Essentials

A raise or bonus is an excellent opportunity to shore up your foundation. Here’s how you can address critical areas first:

1. Pay Down High-Interest Debt

If you’re carrying credit card balances or other high-interest loans, consider using part of your bonus or raise to lower or eliminate that debt. Paying off a balance with a 20% interest rate, for example, is like earning a guaranteed 20% return on your money.

• Example Allocation: Use 40% of your bonus to pay down credit card debt. If you owe $1,000 at 18%, that’s $720 in interest saved over the next year.

2. Build or Boost Your Emergency Fund

Your emergency fund acts as a safety net for unexpected expenses, like medical bills or car repairs. If your savings are thin, this is the perfect time to increase your cushion.

• How Much to Save: Aim for 3-6 months’ worth of essential expenses.
• Example: If your monthly bills total $3,000, try to set aside $9,000-$18,000 over time.

Even if you’re starting small, every dollar you put away brings you closer to financial security.

3. Catch Up on Necessities

If you’ve been putting off essential expenses, like a dental visit or home repair, now’s the time to address them. Staying proactive with necessary costs can save you from larger financial problems later.

Step 3. Balance Spending and Joyful Experiences

It’s okay to indulge responsibly! A financial windfall doesn’t mean you can’t enjoy yourself. However, it’s crucial to strike a balance between short-term wants and long-term needs.

1. Set a Spending Limit

Dedicate a specific portion of your bonus or raise to “fun” spending. Whether it’s a weekend getaway, new clothes, or upgrading a gadget, set a cap so you don’t overspend.

• Pro Tip: Many financial advisors recommend the 30/70 split rule for bonuses. Allocate 30% to guilt-free spending and the remaining 70% to long-term goals.

2. Make It Meaningful

Consider experiences that bring long-term value or happiness. For example:

• A cooking class that teaches a skill you’ll use regularly.
• A staycation to rest and recharge.
• Quality furniture or tools that make everyday life more comfortable.

Prioritize purchases that align with your values to get the most satisfaction.

Step 4. Save and Invest for the Future

Once you’ve tackled debt, secured your emergency fund, and treated yourself a little, it’s time to think about the future. Saving and investing can supercharge your financial growth over time.

1. Increase Retirement Contributions

If you’re not maxing out contributions to retirement plans like a 401(k) or IRA, now’s a great time to boost them. Even small increases can have a big impact thanks to compound growth.

• Example: By increasing your 401(k) contributions by 2% after a raise, you’re saving more without feeling the pinch in your regular expenses. Plus, if your employer offers a matching program, this doubles the benefit.

2. Open a Tax-Advantaged Account

Beyond your employer’s retirement plan, consider options like a Health Savings Account (HSA) if eligible. These accounts offer triple tax benefits when used for qualified healthcare expenses.

3. Invest for Long-Term Goals

For goals like buying a home, starting a business, or funding a child’s education, setting up a brokerage account lets you invest in stocks, bonds, and ETFs. Keep in mind:

• Short-Term Goals: Stick to low-risk investments for anything under five years.
• Long-Term Goals: With time on your side, higher-risk investments (like stocks) can offer substantial growth potential.

4. Set Up a Sinking Fund

A sinking fund is a dedicated savings pool for a specific purpose, such as a wedding, car upgrade, or major remodel. Use part of your bonus to kickstart or boost a sinking fund for these expenses.

• Example: Allocate $2,000 of a $5,000 bonus to your “dream vacation” sinking fund so you’re ready when the opportunity arises.

Step 5. Optimize Your Raise

If you’ve received a raise, it’s equally important to use this increased income wisely. Without a plan, it’s easy to succumb to lifestyle inflation, where higher income leads to higher spending. To make the most of your raise:

• Increase Savings Automatically: If you’re earning 10% more, aim to save at least 5% of that increase. Automate contributions to your savings or investment accounts, so you don’t notice the money missing.
• Retain Some Flexibility: Budget a portion of your raise for new experiences or upgraded comforts, like better groceries or occasional dining out.
• Adjust Your Tax Strategy: A higher salary might move you into a different tax bracket. Consult a financial planner or accountant to maximize tax savings.

Bonus Tip:

If you have recurring monthly expenses, use your new income to prepay some bills or subscriptions. For instance, pay insurance premiums upfront for the year to make future months less financially burdensome.

The Power of a Balanced Approach

Ultimately, how you use a bonus or raise depends on your financial priorities, but a balanced strategy ensures you’re enjoying the present while preparing for the future. Here’s a quick roadmap to guide your allocation:

1. Take care of high-interest debt and emergency savings first.
2. Treat yourself mindfully within a set spending limit.
3. Invest in your future through retirement contributions, brokerage accounts, and savings goals.
4. Avoid lifestyle inflation by automating higher savings after a raise.

Money that aligns with your goals is money well spent. By making thoughtful decisions today, you’re setting yourself up for lasting financial confidence and success. Whether it’s paying off debt, building wealth, or rewarding yourself, your bonus or raise is an opportunity to take a step closer to your dreams.