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Should A Holiday Bonus Be Used To Pay Down Debt?

April 21, 2014 by CreditCardsCo™

MBNA - The Toronto Dominion Bank

It can be very tempting to run to the mall with a holiday bonus and buy a new wardrobe or buy that amazing TV. The fact is that there is sometimes some form of buyer's remorse because there are other things that the money can go toward, such as paying down debt.

Getting a job that gives holiday bonuses can be very exciting. It is even more exciting when the bonus is a substantial one. The moment that time starts getting close, you dream of what you are going to do with the money. For instance, you may want to buy that gift your child has always wanted or maybe you want to use it to do something that is more productive in the long-term.

Unfortunately, the money is not going to stretch as far as you want it to. Every dollar that you hand over is one less dollar that you have. One moment you have the bonus and the next moment you are scratching your head because you don't. This is why some individuals question what they should do with the money. For instance, should a person pay down debt with their holiday bonus? People have student loans, credit card debt, mortgages, and other forms of debt. Some individuals are even saving to put down a down payment on a car or a mortgage. This is why there is so much confusion as to where the money should go. Many individuals do not want to see their bonuses going toward debt and savings.

A Lucky Dilemma

This particular dilemma is a very lucky one. Not everyone gets holiday bonuses and not everyone sees themselves being able to weigh how to spend it. Some find themselves having to apply the money toward debt before they fall behind on a bill or they have to use it to rectify a late bill. Then again, there are those that get nothing at all. Every year, fewer companies are offering bonuses. In fact, only 17 percent of people in an H&R Block Canada survey said they expected a holiday bonus in 2013.

So the question is what you should do with the money? A financial advisor will tell you to break the money down like this: 50-30-20. This means that you should use 50 percent of your bonus toward debt pay down, 30 percent of your money should go into your savings, and the last 20 percent should be used for whatever you want. Most bonus recipients would say they want to use that 20 percent toward Christmas gifts for their family.

This is just a guide, however. It is really up to you to decide how to use your money toward your debt and your lifestyle. For example, you may have credit card debt and student debt. Student loan interest is rather low, but the usual credit card interest rate is usually high. If you have a $2,000 credit card balance with an interest rate of 20 percent and you pay $200 each month, it will take four years and two months to pay that account off. The total interest paid is $945.

In the aforementioned scenario, the solution would be to wipe out the debt or as much of it as possible. This is something that produces a positive long-term impact because you are freeing up some of your paychecks. In fact, paying down debt frees up more money than the amount you used to pay down the debt. This is because you are avoiding interest.

Job Stability

Another factor to consider when deciding what to use your money for is job stability. If you are new to your job, you are not as certain about your job stability as someone who has been on the job for a long time. If the economy would tank and your company would have to make cuts, they will cut their most recent hires first. If this is something that concerns you, you may want to load some of the money into your savings account. Try putting it in a Tax Free Savings Account so that you have money if you need it in an emergency.

So with the stability of your job in mind, it is a good idea to look at that last 20 percent. There is no end to the ways in which that money can be used. With that said, consider what matters to you the most before you hit the mall with it and spend it. Many studies have shown that people gain more enjoyment from the buying experience than they do the actual items. For instance, the new couch may make you happy for two weeks, but it is not long before it becomes a part of the scenery. However, a weekend getaway with the family can create memories that last a lifetime.

If you do buy a physical item, make sure it makes you happier because it makes your life easier for the long-term. For instance, maybe you are in need of a new refrigerator. If that’s the case, hold on to the 20 percent of your bonus until after the holidays so you can cash in on some of the deals in January.

Taxes

One last thing to note is that holiday bonuses can feel like free cash. The fact is that the Canada Revenue Agency does not see it that way. The money is taxable, so make sure your employer is withholding the correct amount of income tax or you could find yourself paying when tax time rolls around. If your employer is not taking out the right amount of income tax or any at all on the bonus, then you may want to hold a little of that money yourself so you can pay your tax bill without a struggle.

Conclusion

Getting a holiday bonus can be exciting, so it can be easy to rationalize spending it on anything that you want. When it's gone, however, the regret can settle in and you may wish that you spent the money on something with a more long-term effect. By spending specific percentages on certain things, you can give that money longevity.

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