Smart Ways to Spend (or Save) Your Bonus or Tax Refund

Receiving a bonus or tax refund is a great feeling. But what should you do with this unexpected income?

There are a lot of smart ways to use bonus money toward reaching your financial goals while still putting some aside for fun things like holiday celebrations, vacations, and big-ticket items.

Here are a handful of ideas for making the most of the extra money:

1. Start or add to your emergency fund. It’s a good idea to open an emergency savings account separate from your regular savings account. This emergency account can be used for unplanned expenses and in times of financial uncertainty. Keeping it separate makes it easier to avoid dipping into this money for regular monthly expenses. Grow this account by putting tax refund and bonus money into it annually, and to kick it up a notch, consider automating smaller regular contributions throughout the year.

2. Pay down high-interest debt. After securing an emergency fund, focus on paying down loans and credit cards with the highest interest rates first. This strategy reduces the amount you’ll spend on interest over time, leaving you with more money to put toward your savings accounts and other expenses.

3. Start a separate savings account for vacations and holidays celebrations. Designate separate savings accounts for the fun stuff. Whether that’s vacations, holiday celebrations, home improvement projects, or large purchases, setting these savings aside separately helps cut down on financial stress when holiday or vacation time rolls around each year.

4. Open or contribute to a retirement account. Consider opening an Individual Retirement Account (IRA) as another way to build and grow your retirement fund. Check out Virginia Credit Union IRAs to compare Traditional and Roth options, determine your eligibility, and make informed decisions about your retirement investments.

 If you or a loved one are approaching retirement age, here are 7 helpful tips for retirement planning.

5. Contribute to college savings funds. If you have children or grandchildren, consider opening or adding to a college savings fund such as a 529 plan. Early and regular contributions can grow over time, helping to alleviate the financial burden of higher education expenses. 529 plans also offer tax advantages that can be beneficial.

6. Invest it. If you’ve made it this far down this list and still have bonus money to spend, consider investing it. Even if you start with a small investment, it has the potential to compound and earn you money over time. It’s a good idea to chat with a financial advisor to figure out the best strategy for your needs. This is usually a combination of your financial goals, how much risk you’re comfortable taking on, and when you’ll need to access the money.

Bonuses and tax refunds can be a great way to increase your financial security. Consider which strategy best aligns with your goals and money values. Picking one purpose for the entire sum can be impactful.

Another frequent strategy is to apply the 50/30/20 budgeting method, where 50% is for needs, 30% goes toward wants, and 20% goes toward paying down debt and building your savings. Ultimately, it’s up to you to decide the best way to spend or save the extra income. Regularly reviewing your budget and adjusting your savings and investment plans is a great place to start creating your plan.