What you should spend your Christmas bonus on

Christmas is a time of goodwill, and it’s become a tradition for employers to throw away the ‘bah humbug’ and dip into their pockets to reward their workers for a job well done throughout the year. So if your boss is more a Christmas Carole and less of a Charles Dickens, then what exactly should you do with it?

One of the toughest things to know is where to start. So first things first, as a broad principle you could start with the 80-20 rule. Or in other words, £8 in any £10 received should be put towards your financial future. Which means if you receive the average year-end bonus of £1,600 then you’d be looking at £1,280 to be sensible with.

Cover the Ghost of Christmas Present

So now that you know how much we’re talking about, what’s the first thing you should do? Well, if you don’t have an “emergency fund” then I suggest you start there. At an absolute minimum you should be looking to have 3 months of living expenses held in a short-term deposit account that you could get your hands on quickly if life throws something unexpected at you. Ideally, that would be 6 months. So if your monthly outgoings were £1,000 then you’d be looking at between £3,000 and £6,000 in your emergency fund.

Don’t forget about Ghosts of Christmas Past

If you’ve already got that one covered, then the next thing you should be looking at is paying down any debts you have. If you’ve got any credit card debt, then it’s a very smart idea to look at that as money you’ve already spent your bonus on and to pay that off. That’s especially true if you’re only paying the minimum amount on your credit card every month. While we’re on the subject of credit cards, you could look at using part of your bonus to pay for a “balance transfer”, where your credit card debt is moved to another card provider. Depending on your circumstances, you could even transfer to a 0% interest card, which would mean every £1 you paid off would go to reducing your debt rather than paying the bank interest.

Paying down debt doesn’t just mean credit cards. If you’ve got a mortgage, you could overpay on that too and potentially get a benefit. If you’re thinking about this, it’s worth speaking to your mortgage provider as not all mortgages are created equal and there may be penalties associated.

Look to the Ghosts of Christmas Yet to Come

The other option is to look to invest your money to hopefully bag an even bigger windfall in the future. One of the least considered ways to do this is to put that into your pension. This is especially effective if you’re a higher rate taxpayer. Chances are the tax relief you’d receive will make the ‘bonus’ even bigger, and the further away from retirement you are the bigger difference that would make to you. Think of it as giving yourself a much, much larger bonus when you retire.

The alternative is to think about investing in an Index Tracker. If you’re not used your ISA for this year, it’s a great way to invest and avoid paying any tax on the gains. If you’ve never bought stocks and shares before, it’s one of the better ways of dipping your toe into the market.

And as for what’s left after you’ve done all of the above? Well, go and do something Foolish, you’ve earned it!

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