4 things I never recommend financial planning clients do with their bonus — and 3 better ideas

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• Buying a new car or the latest tech with your bonus might be exciting, but the value drops quickly.
• Cashing in on the latest trendy stock or putting your bonus in a regular savings account are risky.
• Try to put at least half of your bonus toward goals like paying off debt or planning for retirement.

As a financial planner, I always recommend being deliberate when it comes to your annual bonus. Striking a balance is always smart — while you can have some fun and treat yourself, you should consider spending a portion of those bonus dollars building your long-term financial security.

The key is to avoid using a financial windfall on overpriced status items, things that enable ongoing excess spending, or poor investment decisions. Instead, you should focus spending on reasonable purchases that improve your life, secure your finances, or work toward your long-term goals.

Here are four things you should avoid buying with your hard-earned bonus money — and some advice on what you should do with it instead.

1. Buying a new car

Sure, a shiny, new car seems exciting, but it's probably one of the least financially smart decisions you can make. For one, a car's value drops quickly, making the resale value drop over time.

Plus, if the car is more expensive than your old one, you may be on the hook for higher car insurance payments, potential repair bills, and costs like gas and parking. These costs can add up and crunch your budget long after the bonus money is spent.

If you're in need of a new set of wheels, consider buying quality used vehicles outright without expensive car loans.

2. Getting the latest technology

Running out and buying the latest and greatest new TV, phone, or laptop is tempting. But technology changes and upgrades so rapidly that pouring bonus money into flashy new gadgets often means buyer's remorse sets in fast.

Instead, use bonus cash for necessities or investments that have staying power, not discretionary tech upgrades that will soon feel outdated.

3. Investing in viral stocks

Using your extra cash to get in on the world of speculative investments can seem like a good idea. But it's never a good idea to use your money to invest in something you don't know enough about, or that doesn't have a track record of strong gains.

Many trendy investments come from hype rather than substantive information. Internet chatter can create powerful short-term forces, but these moves often aren't sustainable. Just because an investment goes viral doesn't mean it has strong fundamentals to support stable long-term growth.

4. Putting it in a low-interest savings account

You worked hard to earn your bonus, so it's time to make it work for you.

Stashing your bonus in a basic savings account might be appealing for safety, but most interest rates on these accounts are very low. Plus, that money could stagnate and lose purchasing power over time due to inflation.

Instead, consider putting that money in a high-yield savings account, which boasts much higher rates and can maximize your savings over time. Plus, most high-yield accounts are just as accessible and secure as traditional ones.

Better moves to make with your bonus money

A bonus check allows you to enjoy life — whether booking a flight or buying a nice meal. But it can also help you strengthen your overall financial foundation. I recommend putting at least half of your bonus money toward your financial goals, which might include:

• Paying down debt: Using your bonus to pay down high-interest rate debt like credit cards or personal loans can save you a lot in interest costs. Reducing what you owe lifts a financial burden long-term and frees up cash flow to redirect toward other goals.
• Building a rainy day fund: Putting bonus funds into an emergency fund with at least three to six months of basic living expenses protects you during unexpected crises like job losses.
• Investing for retirement: Even if retirement seems forever away, starting to invest bonus funds in your retirement plan now leverages time via compound growth. Let your money work hard for your future self.

Unexpected bonus money feels incredible to receive. But make sure you're using it wisely so that short-term excitement doesn't result in long-term financial regret.

This article was originally published in January 2024.