What Should You Do with Your Bonus?

September 2020

Ah, one of the most fun problems to have: There you are, minding your own business, gratefully collecting your paycheck twice a month, when – what’s that? – a bird? a plane? No! A BONUS!

For those of us with grand plans for our 35-year-old selves, the excitement of receiving a bonus can be quickly followed by the weight of responsibility and decision fatigue: Can I spend this? Should I spend this? I’m already meeting my savings goals; do I need to save this?

Today, I want to offer an approach to bonuses that prioritizes your humanness and your goals, and hopefully offers a little reprieve from the guilt that accompanies taking your bonus on an expensive date to the Louis Vuitton store and forcing it to pay (which, I’m not proud to say, is how I spent my first bonus… I don’t think the deposit had even cleared in my checking account before the four-figure charge posted on my Discover card – I’ve come a really long way, y’all).

Divvying up your bonus like regular income

It probably goes without saying that if you’re paying down high-interest debt (e.g., a credit card with a high, interest-accruing balance), your bonus probably has nobler goals than what we’re about to launch into. If you’re struggling with high-interest debt, make sure you check out this post that describes how to cut your payoff time in half.

But assuming you’re trucking along with no soul-crushing APR hanging over your head, you can follow this easy formula that (mostly) mirrors the breakdown we use for divvying up your regular income. We want to assign every dollar a job.

In an ideal world, we’d allow ourselves approximately 25% of our take-home pay for fun stuff, leaving 75% to pay for living expenses, saving, and investing. As a general rule of thumb, 10% is the minimum you’d want to save every month, and 30-40% is a generous and admirable goal to shoot for, depending on your situation. [Curious to learn more about this breakdown? Check out “How to Budget for Discretionary Fun Stuff,” which provides a more satisfying description of these concepts.]

But since we’re talking about a bonus – and a bonus is inherently extra income that isn’t budgeted for – you don’t need to worry about leveraging a chunk for living expenses. They’re taken care of. Thanks, cold brew-driven responsibility, for setting up that budget way back when!

Instead, let’s hit our saving and investing goal of 40% and use the rest for whatever we want.

Save 40% and spend 60%

Why not just save it all?

Because you earned it. And you’re a human being who’s probably driven by the same reward systems and incentives that earned you the bonus in the first place.

By saving 40% of it, you’re still (intensely) taking care of Future You, but you’re remembering to reward Present You for a job well done. There’s something to be said for balance in the financial realm, where feeling the results of your hard work every once in a while is, in some ways, more advantageous long-term than denying yourself at every turn in favor of your retirement income.

Growing up, my dad would always spend his bonuses on some big project. One year we redid the kitchen. Another year we installed hardwood floors upstairs. He didn’t necessarily love his job, and being able to create these tangible changes that improved his life (and mine, and my mom’s) was a nice reminder that he spent two hours a day commuting and 8 hours a day in an office for something. (Granted, my parents were also extremely frugal, and are now retired in their early fifties – so they certainly knew the meaning of saving and investing aggressively.)

Where should that 40% go?

When I say “save” 40%, I don’t necessarily mean literally save it in a savings account. The “where” depends on your location on the larger trajectory of your financial journey. The post “How to Prioritize Where You’re Investing, and Why” outlines the priority order of where you should be most concertedly focusing your attention, but it hopefully goes without saying that your emergency fund trumps all else – if yours isn’t Herbie: Fully Loaded already (usually, about $15,000), then that’s home base for your 40%.

Spending the rest guilt-free

I mean it. Do it. Spend it! Have some fun! Even if you set it aside for the next month of ludicrous UberEats lunch deliveries and a massage in the middle of a Wednesday afternoon, make sure you enjoy it and splurge a little. That way, the next time you near the cliff of your restaurants budget or feel tempted to blow your entertainment budget out of the water, you’ll remember that you’re not deprived of joy. You’re staying the course and enjoying it.

Some women I work with have bonuses that nearly clear $30,000. Others might receive a $1,000 cash bonus once a year and call it a day!

The total amount will probably dictate what you end up doing with it (for example, if you get $30,000, you may not actually want to spend $18,000 in one sitting on something ridiculous) – but the stakes may raise a little. A $30,000 bonus once a year would be enough to put a 20% down payment on a $300,000 house after just two years – in that sense, you’re investing and spending it (#trippy) because a home can be an investment, but you’re obviously also forking it over and no longer have liquid cash on hand.

Enjoy the fruits of your corporate labor – go forth and prosper (at a rate of 60%).