The holidays are here! That means quality family time, sumptuous dinners, and an endless stream of cheesy Hallmark movies.
And if your boss decided to play Santa this year, it might mean a holiday bonus for you.
That bonus is likely to be pretty hefty too. The average holiday bonus in 2017 was close to $1,800, according to a survey by staffing and recruitment firm, Accounting Principals, and it’s expected to grow with each year.
When you get your bonus, you’ll find yourself faced with a great question: How should you use your Christmas bonus?
We’re all about the Rich Life here at I Will Teach You to Be Rich. That means using your money to build the kind of life you want to live. To do that, you should use your holiday bonus three ways:
- Spend it
- Save it
- Invest it
Let’s take a look at each area now and break down how you can optimize your holiday bonus.
Christmas bonus tip #1: Spend it
The first — and arguably, most fun — thing to do with your holiday bonus is to spend it. After all, what’s a Rich Life without spending extravagantly on the things that you love?
Notice I didn’t say spend it on the latest tech or fashion. I said spending it extravagantly on the things you love.
That could mean spending your bonus on the latest fashion or tech, but if you really examine what you love spending money on, you might be surprised to find it’s something else entirely.
The area where you love to spend your money is called a Money Dial. These are things you naturally gravitate to when it comes to your spending. Once you recognize your Money Dial, you’ll be able to lean into it and spend more in that area — while ignoring most everything else.
Take Ramit Sethi, founder of I Will Teach You to Be Rich, for example. If you took a look at his spending habits for just a few minutes, you’ll be able to see that his Money Dial is convenience. He knows this too. That’s why he has that dial turned all the way up to 11. That means spending money on:
- A private chef ($21,635.64 / year)
- A personal trainer ($16,380 / year)
- A nutritionist ($3,000 / year)
Not to mention his personal assistant who helps plan his day-to-day schedule as well as his travel arrangements. That means when he travels, he’ll get his favorite seat on the airplane, the perfect room in the perfect hotel, AND he’ll have food waiting for him at the check-in desk so he can keep up with his personalized diet.
All told, he spends more than $50,000 on convenience each year. That might seem crazy to you — and that’s okay. Convenience is a Money Dial for Ramit and a lot of other people. You might have a different one, like travel.
People who have the travel Money Dial love to spend money on everything travel related. They tend to know exactly where they’re traveling for the next year starting on January 1st, and they have a massive list of potential destinations they want to go to next.
If you turned this Money Dial up, that can mean things like:
- Luxury safari tours ($3,000 / day)
- Inspirato membership ($3,500 / year + $20,000 initiation fee)
- Private tour of the Vatican ($300+ / person)
ACTION STEP: Spend your holiday bonus on your Money Dial
If you don’t know what Money Dial you naturally gravitate to is, that’s okay. It’s actually fairly simple to figure it out.
As Ramit says, “Show me a person’s calendar, and I’ll show you their priorities.” If you showed me your bank statements, I could tell you your Money Dial.
Spend 10 minutes examining last month’s bank statement. What common themes do you see?
Are you spending money at the gym and workout clothes? Maybe your Money Dial is fitness.
Are you spending money on movies and events with your kids? Maybe your Money Dial is family.
Are you spending money on the newest shoes and clothes? Maybe your Money Dial is fashion.
Once you’ve identified this, you can actually save money by spending more toward your Money Dial. By knowing what really matters to you, leaning into it, and mercilessly cutting out spending in other areas, you’ll be able to actually save money and put it toward the things that make you happiest.
No matter what your Money Dial is, recognizing and leaning into it will help you live a Rich Life.
Which brings us to …
Christmas bonus tip #2: Save it
Sure it’s easy to spend your holiday bonus money on something fun for yourself — but maybe you should put it away for your savings goals.
When it comes to savings goals, there are two great ones you should consider putting your holiday bonus into:
- An emergency fund
- A BIG purchase
An emergency fund is money you’ve saved for unexpected spending. While the amount you’ll have in your emergency fund is going to be different from the next guy, a solid rule of thumb is to save three to six months of living expenses.
This encompasses things like:
- Car payment
- Student loans
Why save for these things? Simple: You don’t want to go into a financial crisis because of an unexpected expense. I’m talking about things like emergency medical bills, car repairs, or loss of income. A rainy day fund helps soften the financial impact of an emergency.
The second area you can save is for a BIG purchase. I’m talking about things like a down payment on your home or your future wedding.
A great way to do this is by saving money in a sub-savings account. These are smaller accounts you can create along with your normal savings account. The difference is that your sub-savings accounts are dedicated to specific purchases or spending.
Sub-savings accounts are crucial psychologically. By reminding you of what you’re saving for, you’ll be able to keep motivated to accomplish your savings goals.
When I received my holiday bonus last year, I decided to treat it like I would any paycheck and divide up a specific percentage of it into my different sub-savings account. It was great seeing them balloon even more after the bonus.
My sub-savings accounts. Notice I have one for my emergency fund as well!
ACTION STEP: Decide how you want to save your holiday bonus
Whether you put some money into an emergency fund or a sub-savings account, saving is a crucial part of ensuring your financial future. If you really want to see your money grow in the long term, though, there’s no better way than investing.
Christmas bonus tip #3: Invest it
Investing is possibly the most crucial thing you can do today to make sure you’re financially stable in the future.
That’s why you should consider investing a portion of your holiday bonus when you receive it. When you do, your holiday bonus will grow over time.
For example, let’s assume you got a holiday bonus of $500. Not too shabby. Now let’s see what happens if you invested it in a low-cost, index fund that tracked the S&P 500. Assuming an average of 8% interest each year, how much do you think you’d earn by the time you retired?
Let’s take a look:
Data calculated at investor.gov.
Over the course of 50 years, your $500 will have grown to $23,450.81. That’s a nearly 47x increase!
Also, that’s with ZERO monthly contributions to your investment. If you invested just $50 / month on top of the principal, you would end up with $367,712.90! Pretty awesome.
ACTION STEP: Invest your holiday bonus for the future
When it comes to investing, there’s no better way than investing in a 401k and a Roth IRA. These are the two best accounts to save for retirement as they are tax-advantaged, meaning you can avoid paying certain taxes when you invest into them.
How will you spend your bonus?
Now we want to turn it to you: How are YOU going to spend your holiday bonus? Are you going to be spending it on something you love? Saving it for a rainy day? Or maybe investing it to watch it grow?
Leave your answer in the comments below. We would love to hear your thoughts.