If the number of employees receiving end-of-the-year bonuses is indicative how the economy is doing, it looks like things are on an upswing.
According to a recent survey by the aptly named Challenger, Gray, and Christmas, Inc. (an outplacement company), good tidings from employers are increasing: 72 percent of companies plan to give their workers some sort of financial compensation before ringing in 2013, up from 53 percent last year.
Here, five smart things to do with your unexpected cash windfall.
Pay down your credit-card debt.
Without a doubt, if you’re among the 46.7 percent of U.S. households carrying this high-interest debt (according to NerdWallet.com), it’s costing you—a lot. Making a large lump sum payment is one of the easiest—and fastest—ways to get rid of it. If you’re carrying balances on multiple cards, put the cash towards the piece of plastic with the highest interest rate in order to get the most out of your bonus earnings.
Build an emergency fund.
Money experts agree: You need to have three to nine months’ worth of living expenses—mortgage or rent, food, utilities, transportation—set aside in case the unexpected happens (ie. job loss, sudden illness). If you don’t already have a fully funded emergency account, or have yet to set one up, now’s the time to do so.
Sock it away in savings.
If you want to be able to access the cash, but don’t have something you want to purchase right this moment, keeping it liquid in a savings account is your best option. You probably won’t make much interest on your money, but any earnings are certainly better than none at all. If you don’t already have an account, or are looking for a better one, check out this Mint.com tool.
Make an extra mortgage payment.
Despite interest rates being at rock-bottom levels, it’s still costing you to have a mortgage. Using your bonus check to make one extra payment this year can knock years off of your home loan and even better, reduce the total amount of interest you pay. Use this Bankrate.com tool to find out how much you’ll save and what your pay-off date changes to.
Max out your IRA.
Even if you’re participating in an employee-sponsored retirement account, like a 401(k) or a 403(b), it’s wise to have an IRA as well. After all, according to a study by the Employees Benefit Research Institute, only 14 percent of workers are confident that they will have enough money to live comfortably during their golden years. And even more disturbing: 30 percent of workers have less than $1,000 in savings and investments. If you’re under the age of 50, you can contribute up to $5,000 a year in a Traditional or Roth IRA. (Next year, this limit increases to $5,000 annually.) So even if you’d like to splurge on a new car or a designer handbag, saving for your future might be the smartest decision of all.
Ashley Tate is the money editor at Real Simple, a women’s lifestyle brand that focuses on making life easier.