8 Ways to Make the Most of Your Holiday Bonus

Smart ways to spend your holiday bonus

No matter where you work, there's always a glimmer of hope you'll find something extra in your paycheck around the holidays. In the event such dreams actually do come true, a windfall of cash can make us do some strange things. Suddenly, even the most frugal shopper is looking for any excuse to spend their extra money.

If you find yourself sitting on a pile of unexpected cash, don't start blowing through your reserves quite yet. While the following options may not represent the sexiest way to spend your year-end bonus, consider their benefits to make the most of your hard-earned money.

1. Catch Up on Credit Cards
According to the Federal Reserve Board, December is when Americans acquire the most credit card debt. Last year more than $851 billion was spent using credit cards in the one month alone. If you contributed to this amount, keep some of your bonus in reserve to quickly tackle bills when they come due. Making small payments or postponing them into the New Year will cost you more in the long run.

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2. Spend Some
No matter how financially responsible you are, it's human nature to want to treat yourself to something special. Since you worked hard to earn that bonus, there's no reason you shouldn't reward yourself. However, don't throw smart spending out the window just yet. Your dollar will go further if you still take the time to compare prices and use coupons. For impromptu purchases, keep the Coupon Sherpa app installed on your smart phone for instant savings at hundreds of stores.

3. Emergency Fund
Though the Mayan apocalypse passed without incident, no one knows what the future will hold. There's no need to hoard canned food, but having an emergency fund helps ease the burden of the unexpected. Knowing you have the cash to cover repairs makes a burst pipe or car breakdown that much less stressful.

4. Plan for Taxes
Powerball winners and professional athletes are quick to tell you how distant relatives suddenly emerge from the woodwork when you make it big. Though your holiday bonus isn't likely to draw in conniving cousins, the government will still want a piece. If you're not sure what kind of tax burden to expect, hold off on most of your spending until you know what you owe. Paying taxes isn't an ideal way to use a bonus, but it's still better than dealing with the IRS.

5. Create a College Fund
For most parents, starting a college fund is always on the list of priorities. Despite the good intentions, life is filled with expenses that quickly sidetrack such plans. While you have the cash, consider setting up a 529 plan. These plans come with significant tax advantages, not to mention scholarship matching and exemption from financial aid calculations. For more information on how a 529 plan works, see what the IRS has to say.

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6. Manage Your Mortgage
A mortgage is a scary commitment. Signing up to make payments for the next 30 years comes with a certain amount of stress. If you're struggling to keep up with the high monthly costs, you may want to use that holiday bonus to refinance. Mortgage rates are relatively low right now, and using that chunk of change to improve yours will keep more money around each month.

7. IRA Investment
Even if complex financial management makes your head feel like it's going to explode, a certain level of attention is still required. One of the easiest investments you can make is contributions to your individual retirement account (IRA). Those under 50 years old can contribute up to $5,000 per year, up to the amount of taxable income. Those over 50 are allowed to contribute up to $6,000 per year, not exceeding taxable income. You won't see the benefits now, but you'll appreciate it when you're retired and spending the day on the golf course.

8. Accelerate Payments
Maybe the reason so many people blow their year-end bonus is that managing money is miserable. Evaluating and improving your credit to debt ratio isn't glamorous, but it helps you get what you want in the long run. Consider doubling up on car payments or other loans you've acquired to improve your credit score and open up other financing options.

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Andrea Woroch is a nationally-recognized consumer and money-saving expert who helps consumers live on less without radically changing their lifestyles. From smart spending tips to personal finance advice, Andrea transforms everyday consumers into savvy shoppers. She has been featured among top news outlets such as Good Morning America, NBC's Today, MSNBC, New York Times, Kiplinger Personal Finance, CNNMoney and many more. You can follow her on Twitter for daily savings advice and tips. For all media inquiries, please contact Andrea Woroch at andrea@andreaworoch.com.

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