Year-end bonus? 3 smart ways to use it to build wealth

By Brian O'Connell/MainStreet.com

There's a good chance you'll earn a year-end bonus this year, if industry averages hold up.

According to a 2012 study from Challenger, Gray & Christmas, 72 percent of U.S. companies will give employee bonuses, with those bonuses mostly tied to company performance.

If you get a bonus this year, be smart about how you use it. There's no law that says you have to spend a year-end bonus on a trip to Cancun or on a new convertible.

According to Nicole Mayer, a financial planner at Chicago-based Life Transition Specialists, the best move is to use the cash to help cement a better financial future. "It can be very tempting to take the supplemental income and buy your kids some extra gifts," Mayer says. "But you could be penalizing yourself in the long run if you do that. There are some very smart ways to use this money which can help you earn even more in the long run."

That's a novel idea -- using your bonus money as a launching pad to making even more money. Here are three ways to do it:

  • Use the cash for your retirement. Taxes can eat away at a year-end bonus, unless you pour the money into a retirement fund. "As much as a quarter of year-end bonuses are often taxed, which is offset if you put those funds into a 401(k) or IRA," Mayer says. "Plus, if your employer matches year-end bonus contributions, you could immediately grow your bonus by several hundreds of dollars."
  • Slash credit card debt. Credit card debt, especially the interest accrued on that debt, is a threat to your household budget. So why not take that employee bonus and use it to cut credit card costs? "The average American is paying approximately 13 percent interest on their credit card balances," Mayer says. "A large payment toward your credit card could literally save you thousands over the next couple years."
  • Fatten up bank savings and cut fees. Mayer says a big lump sum deposit at your bank can give you more negotiating leverage on bank fees and other issues. "A lump sum bonus check often will put you in the position to negotiate better savings and checking account rates with your bank," she says. "Use this opportunity to do some research on your fees and rates of return to ensure you're getting the biggest bang for your buck."

The idea with year-end bonuses is to use them to help build and sustain wealth, and not on frivolous items. "Even if you're only getting a couple hundred dollars, you have the opportunity to turn that into a couple thousand dollars if you're smart," Mayer says. "And, as always, if you're unsure about the best move for you, talk to a financial advisor."