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8 smart uses for a year-end bonus

Used wisely, your reward for 12 months of hard work can produce benefits for years to come.

By MSN Money Partner Dec 26, 2012 6:47PM

This post comes from Richard Barrington at partner site logoDid you get a little something extra in your paycheck this holiday season?


Image: Businesswoman (© Roy McMahon/Corbis)If you just received a year-end bonus, congratulations. With money tight and the economy uncertain, those extra dollars can be hard to come by. Now the question is: How do you use that hard-earned bonus wisely?


Here are eight suggestions for getting the most from your year-end bonus:


1. Treat yourself -- within reason. 

Splurge. Indulge. That may not be what you were expecting to read in an article on financial advice, but it is very important to get some enjoyment out of your achievements. The important thing is to set limits. Otherwise, your financial windfall may make you feel like you have a license to spend money, which can lead to burning through more than the windfall itself.


Instead, budget a portion of your bonus and reward yourself with some short-term gratification. Then take the rest (ideally, the majority) of that bonus and put it to good long-term use.


2. Pay off credit cards.

While interest rates generally have been falling to record levels, the Federal Reserve reports that rates on outstanding credit card balances recently reached their highest level since 2010, at 13.22%. As a result, using your bonus to pay off a credit card may be one of the most productive moves you can make with it.


3. Get your mortgage above water.

With 30-year mortgage rates now around 3.5%, the only thing that has stopped some people from refinancing is that they still owe more than their homes are worth, due to the decline in housing values. With housing prices starting to recover somewhat, a year-end bonus might make the difference in getting your current mortgage loan above water. That, in turn, could put you in position to take advantage of some of the lowest mortgage rates on record by refinancing.


Look at this as the best of both worlds: You get to spend the money by putting it toward your home's equity, but you still get some ongoing benefit from that money in the form of interest savings.


4. Max out your retirement contributions.

If you haven't reached the contribution limits on tax-deferred plans such as an employer-sponsored 401k or a traditional IRA, then putting your bonus into one of those plans can have multiple benefits: You can defer paying taxes on the amount contributed, build your retirement savings and compound those savings with future investment earnings.


If your employer makes 401k matching contributions, you might even be able to boost the effective size of your bonus by qualifying for that matching money.


5. Start a college savings fund.

If funding a college education is in your future -- whether for yourself, your spouse or a dependent -- then contributing to a tax-advantaged college savings program such as a 529 plan might be a good use for your bonus. According to figures from The Economist, U.S. college tuition in 2010 represented 38% of the median U.S. annual compensation. For most people, that's too heavy a load to bear all at once, so some advance savings can make paying for education much more manageable.


Not only that, but a 529 plan can allow you to take a tax deduction now and pay no tax on distributions from the plan later on -- as long as the money is used for qualified education expenses.

6. Rebalance your portfolio.

As your goals, income and gains or losses change, your investment portfolio needs to be readjusted periodically. Rather than having to force security sales to make these adjustments, the most efficient way to rebalance a portfolio is to do it when introducing new money into the program.


7. Get a better savings account rate.

If you are putting some of your bonus into a savings account, take the opportunity to ensure that your account is offering a competitive yield. Be sure to shop for the best rates before you settle on a new savings account, and be aware that making a larger deposit might qualify you for higher rates.


8. Eliminate checking account fees.

Free checking accounts are getting harder to find, but banks generally will waive checking account fees if you meet a minimum balance requirement. The money from your year-end bonus might beef up your account enough to meet that threshold, and those savings could amount to more than you would earn in interest on the same amount of money.


A year-end bonus is your reward for 12 months of hard work. If you put that bonus to work wisely, you could see it continue to reward you over the next 12 months -- and beyond.


More from and MSN Money:

Dec 26, 2012 11:32PM
Bonus?  BONUS???  I'd settle for a good job with decent pay and some benefits.  Oh crap!  I'm such a slacker that I only have two college degrees and decades of productive technical work experience, but I'm 58 years old, so there's no such job for me.  Oh well.  Such is life today.  Good luck to you young people trying to pay off college loans and start families.  You're going to need it.
Dec 27, 2012 12:39PM

I quit my 100K a year job and opened a food truck 2 years ago, best move I ever did. More money and no B/S

Dec 27, 2012 1:10PM
Funny, but our boss quit giving us bonuses several years ago claiming it a result of the economy problems, also, cut our pay and hours.  Yet she has purchased 2 new cars in just as many years, remodeled several areas of her HUGE expensive home, buys a new wardrobe, hires a personal trainer and spends, spends, spends all the time.  We've pretty much figured out that the problem with the economy was just a ruse for her to pocket more money for herself.  We don't even get a Christmas card saying 'thanks for doing a great job' from her.  Never will get our pay back, much less a raise - bonus?  That's a joke.
Dec 27, 2012 12:04PM
the company i work for eliminated all bonus incentives to shop floor personel,they do however dangle the double time and triple time carrot,but only when shipping and revenue needs are concerned. then, at our all hands meetings they tell us how good we are doing money wise. two times a year we get a 1hr free lunch. not hard to figure-out what their priorities are ..... we are just a useable commodities.
Dec 27, 2012 3:19PM

All of that with my one-year subscription to the jelly of the month club??

Dec 27, 2012 4:17PM
I have never received a bonus at any of my jobs. I work in health care. And it's only getting worse. That  'little' 1% Obama cut hit us for over 2M dollars this year, we laid off 138 employees with more to come. Hang on, its only just begun. My worry is what kind of health care are you getting in the future? Not as good, and not as thorough, me thinks. 
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