The Biggest Mistake To Avoid With Your Holiday Bonus This Year

The year's end is here and with it comes the coveted holiday bonus, that little extra something that many workers rely on. But the question every year is, what to do with that extra cash? It's a gift, after all, and gifts are meant to be fun, so why not splurge and treat yourself on something fun? If you've seen the movie "Christmas Vacation," you may recall Clark W. Griswold counting on his bonus to make his family happy with a pool. But in the real world doing something so frivolous is actually a huge mistake when it comes to taking advantage of your extra end-of-year income.

A recent survey by Agital looked at over 1500 employers and employees across the U.S. and discovered that 60% of employers were planning on giving a cash bonus for the holidays this year, while 42% of workers were expecting one and, while those bonuses spanned a variety of industries, the anticipated values ranged from $100 to more than $5,000.

A holiday bonus is technically disposable income, so it can be tempting to follow Griswold's dreams of buying something you or your family have been longing for. In fact, according to the American Psychological Association, spending money on something that suits your personality actually increases happiness. But the problem is that the happiness is fleeting and once that money is spent, it's gone. If you are able to take a step back and look at your finances from a broader, long-term perspective, you will quickly realize that putting those funds to work for you or using to improve your financial situation is a much smarter decision.

Spending that additional money on something to treat yourself or your family is awfully tempting, and in fact many workers do just that. Earlier this year Statista released data on how U.S. workers planned to spend those holiday bonuses in 2022 and an overwhelming 36% of respondents reported wanting to use them for Christmas presents (although if you follow this advice from Money Digest, you can save throughout the year so you are well-prepared come the holiday season). Other spending choices, some of which are frivolous (although understandable), included large purchases, traveling, and making improvements to homes and gardens.

Statista's research also found that a large number of respondents, 33%, to be exact, planned wiser uses for those bonuses like using them to pay bills and pay off debts, while 22% planned to put the extra funds toward investments. Investing a holiday bonus or using it to pay off bills and pay down debts may sound like boring options, especially when the money is essentially a gift, but in the long run, these options are financially sound decisions as they go toward improving your financial security now and in the future rather than giving you a short time burst of spending euphoria.

While an end-of-year bonus can help with the holiday spending, there are other ways to manage those expenses. Money Digest has some great tips on budgeting for the holidays so you can focus on other things, like paying down credit card debt. Consumer Affairs found that, as of the fourth quarter of 2023, U.S. household debt had reached a whopping $17.5 trillion dollars. This debt includes things like mortgage balances, loan balances, and credit card debt, all of which will carry long-term consequences on an individual's (or family's) personal finances as they move through life, particularly as they plan for retirement. While a holiday bonus may seem like just a drop in the bucket, it can help pay off those debts.

It can also be invested into something like a mutual fund or an IRA that will help grow that bonus into a much larger amount over time. Another option is to use that bonus to fund an emergency account, something everyone should have. You never know when you could have a plumbing emergency, need to pay car repairs, or even pay unexpected hospital bills for a medical emergency or illness. Having a well-funded emergency fund can not only give you peace of mind but make a world of difference during a difficult time. Putting your holiday bonus into such an account, especially if you add to it year after year, can leave you with a healthy cushion that will go much further than buying a fancy television.