What's the Best Way to Use My Holiday Bonus? [Ask Lifehacker]

Dear Lifehacker,
I'm really lucky to be expecting a nice holiday bonus this year, but I'm not sure what to do with the extra money. Should I save all of it? Use it to pay off some credit card debt? Then again, I could think of a lot of things to do with the bonus, like get some new games. What do you think I should do?
Thanks,
Appreciative Worker

Dear Appreciative,
Congrats on the bonus. Yours is a good dilemma to have. How to best spend or invest your bonus might depend on how much you have to work with: If the bonus is only $25, for example, put it towards something that will enrich your life, like some good books or one of the cool items we like the most.

Since it's sort of like found money, you technically wouldn't notice not having that bonus money, which makes it great for making more headway on your financial goals like getting rid of debt or saving for emergencies. Here's the order of basic financial priorities, according to financial advisers quoted in the Wall Street Journal:

Debt: pay off high interest credit cards and loans firstEmergency savings: Then save enough for 3 to 6 month of expenses (in today's economy, 8 to 12 months may be wiser, however)Retirement savings: Contribute at least as much as needed to get a company match in your 401(k)College savingsMortgage prepaymentBuying insuranceEstate planning

Using this as a guideline, apply small bonuses like $100 or so first to debt. If you have no debt, add it to your emergency fund. If you have a decent cash reserve already, put it into your retirement account. And so on.

If you have more money, say a couple of hundred dollars or more, you could use some of it for savings, some for debt repayment, and some for fun. This way, you continue building your financial foundation, but also get to enjoy your windfall.

The actual percentage breakdown is up to you and would vary according to your personal situation, but a 50/30/20 rule is a good general guideline: Use 50% to pay off debt, 30% for savings, and 20% for fun.

So, for example, if you have a $1,000 bonus, apply $500 to reducing debt, $300 to savings, and $200 for fun.

When it comes to spending your fun money, you may be happiest spending on experiences rather than possessions: Things like a weekend getaway or concert tickets rather than toys. It also is smart to spend your money where you spend the most time: a good chair or mattress, for example. Buy radically improved everyday things like good shoes to improve the quality of your life.

The 50/30/20 rule is just a guideline and you should definitely adjust for your situation.

For example, if you have a lot of high-interest debt, you would probably be better off spending more towards debt reduction: 80%, for example, to paying off your credit cards, 10% to savings, and 10% for fun. (I believe it's important to keep some fun money in there.)

The exception might be if you have an insecure job and you think you might be laid off in the near future (it doesn't sound like it, though, with your bonus). Then it might be wiser to apply more to savings than to debt reduction: 50% for savings, 30% for debt, 20% for fun.

If you have no debt but an emergency fund that only covers a couple of months (or less) of expenses, apply the the 50% to savings. So, 80% for savings, 20% for fun.

With a solid financial foundation—a healthy emergency fund and no debt—apply the money to your long-term savings and retirement. Long-term savings would be things like a new car five years from now. So, say, 50% to long-term savings, 30% to retirement, and 20% for fun. Or you could increase the fun money percentage since you're doing well.

MSN Money has a calculator tool used for budgeting that can give you a breakout of where your money should go. (Replace "needs" with "debt repayment" and switch the wants and savings percentages around.)

Again, however, the actual percentages aren't as important as making sure you're building a solid foundation and put your money where it will benefit you most. There's no one right way to spend extra money, so do what's best for your financial situation.

Enjoy!

Love,
Lifehacker

P.S. How would you spend a bonus?

Photo by Florence McGinn.

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