As the year draws to a close, many professionals look forward to the welcome addition of a holiday bonus—a reward for a year's hard work and dedication. Holiday bonuses may have started as a little morale boost, customarily intended to supplement seasonal spending for employees, but they’ve become integral to total compensation. And though rarely guaranteed, it’s something many people look forward to every year.
While it's tempting to splurge on a shopping spree or search for last-minute ski chalets, your bonus offers a prime opportunity to boost your financial stability and plan for the future. Here’s some practical advice on how to allocate your bonus wisely, ensuring it brings long-term benefits well beyond the festive season.
Trends in Holiday Bonuses
Companies are feeling the pressure of uncertain economic times, and some are even scaling back on bonus offerings. One survey last year found that 34% of employers wouldn’t be offering year-end bonuses in 2023, a 7% increase from the previous year. The verdict is still out for 2024, but similar concerns continue. [1]
As you’ve no doubt noticed, Americans are also wrestling with how to manage their finances, perhaps especially during the holiday season. A Statista Global Consumer Survey found that 36% of Americans plan to use their holiday bonus for gifts this year, while 33% intend to pay bills or reduce debt. According to data from Vericast, this holiday season is shaping up to be a battle between saving and spending. Trends show an increase in financial caution as individuals focus on saving over splurging. [2,3]
Prioritizing How to Use Your Bonus Wisely
How you choose to use your bonus can make a big difference in both your current happiness and future goals. We suggest considering a balanced approach—split your bonus into spending, saving, and investing. This way, you get to enjoy a treat now while also making progress toward longer-term objectives.
It's normal to want to enjoy your bonus immediately, but it’s equally smart to think ahead. Planning now can help you maximize those benefits later.
Immediate Needs
Topping the list for smart financial management is tackling any high-interest debt you might have, like credit card balances or personal loans. Paying interest is like flushing money down the drain, so paying down your balances helps alleviate financial stress. Getting high-interest debt off the table provides a better financial foundation moving forward.
Using the money to take care of other pressing concerns can also help you avoid financial emergencies or regrets later. Would it make sense right now to pay for elective but beneficial health care needs, cover home and car maintenance, or take a trip with your family to visit ailing loved ones?
Long-Term Planning
It’s always smart to be prepared for the unexpected. Have you set up an emergency fund? Think about how long you could manage your expenses if your job situation changed suddenly. It’s a good idea to have about three to six months’ worth of living expenses tucked away, just in case. If you find your emergency fund isn’t quite where it should be, your bonus could give it a nice boost.
While you're reviewing your finances, take a look at your retirement accounts or other long-term savings vehicles. Allocating part of your bonus here could really pay off in the future. Even a small addition now can compound over time, helping you build a more secure and comfortable retirement.
Discretionary Spending
Of course, we don’t expect you to put every penny of your bonus into obligations, savings, or debt reduction. It’s completely reasonable to treat yourself too! Whether it’s gifts, experiences, or that special something you’ve had your eye on, allocating a part of your bonus for some personal enjoyment is a fantastic way to celebrate your dedication and hard work. This would include saving short-term for next year’s vacation getaway, an upcoming anniversary gift splurge, or the boat you’ve been eyeing.
Investing
If your finances are looking strong and you’re clear of any pressing debts or savings needs, your bonus could be a pathway to grow your wealth through savvy investing. Take time to explore options that align with your risk tolerance and financial goals, such as stocks, bonds, or even real estate. Year over year, an extra year-end boost could contribute to gaining financial freedom earlier, achieving meaningful lifestyle goals, and building a legacy for your heirs.
Understanding the Tax Side of Your Bonus
A bonus is a big win for your bottom line, but don’t forget about the tax implications. If you’re new to getting bonuses, this can come as a big shock, but even seasoned bonus recipients sometimes feel blindsided by the tax impact as the amount ticks upward. The problem is that bonuses are considered supplemental wages and are taxed differently than your regular paycheck. As a result, your take-home amount may be less than expected and the overall impact can be complicated.
There are two methods for calculating bonus tax withholdings: the percentage method and the aggregate method.
Percentage Method: Bonuses up to $1 million are taxed at a flat 22%, and any amount over that at 37%. So, for a $40,000 bonus, the federal tax withholding would be about $8,800.
Aggregate Method: This combines your bonus with your regular wages, possibly resulting in higher withholdings depending on your tax bracket. [4, 5]
To estimate your net bonus, use the IRS Tax Withholding Estimator at https://apps.irs.gov/app/tax-withholding-estimator. This tool can help you plan any necessary adjustments to your paycheck, like tweaking withholdings or deductions.[6]
If you’re looking to minimize your tax hit, there are strategies to explore:
Adjust your W-4 to manage withholdings more effectively.
Utilize tax deductions such as medical expenses or charitable donations to reduce your taxable income.
Contribute to tax-advantaged accounts like 401(k)s or IRAs.
Defer your bonus to the next year to stay in a lower tax bracket. [5]
For the best approach, consulting with a financial advisor and tax professional can help you identify the strategies that best suit your financial situation and goals.
Striking the Right Balance with Your Holiday Bonus
Getting a holiday bonus is not just a chance for some instant fun—it's also a perfect opportunity to pave the way for your future. Use your bonus wisely by finding a balance between enjoying the present and making savvy financial choices. By making informed decisions now, you can enjoy immediate pleasures while also building a foundation for long-term financial stability. If we can offer help in navigating your bonus options and planning for a secure financial future, please contact us. Let's make your bonus work for you in the best possible way!
Sources:
2. https://www.statista.com/statistics/1351193/christmas-bonus-plans-us/
4. https://www.bankrate.com/taxes/how-bonuses-are-taxed/#hab
5. https://www.nerdwallet.com/article/taxes/bonus-tax-rate-how-are-bonuses-taxed
6. https://apps.irs.gov/app/tax-withholding-estimator
The Hatlestad Group is an independent wealth management firm based in Edina, Minnesota, primarily serving successful head-of-household women, late-career executives, and pre-retirees. With a tailored approach to fee-only comprehensive wealth management, they empower clients to live out their next chapter with vision, wisdom, and resources, creating a purposeful and meaningful future. They can be reached by phone at (763) 259-3637, via email at info@thehatlestadgroup.com, or by visiting their website at thehatlestadgroup.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.