Tuesday, July 31, 2012

Should You Use Your Bonus To Pay Off Credit Card Debt?

The good news is, you can probably expect a bonus this year. A recent poll by CNNMoney revealed that 33% of respondents are expecting a 3-4% bonus. To put this figure in perspective, an individual that makes ,000 a year would receive ,000 with a 4% bonus. To keep your finances tidy in 2013, it is important how you use this bonus money. Here are the five top ways most people spend their bonuses, and which ones you should choose.
Luxury Items

You may feel like a bonus is a reward for hard work and you should use the money to buy yourself a treat. This may be a vacation, or something you have been wanting for awhile, such as a Keurig machine or an icehouse.

Emergency Funds

If you don't already have an emergency fund in place, you may use the money to establish one. All money experts lecture on the importance of having such a fund in place. Estimates vary on how much you should have in your emergency fund, from ,000 to six months' worth of income. While the amounts vary, no one argues that such a fund is essential to financial stability.

Home Updates

You may be preparing your home to sell. In this case, you may want to use your bonus to perform some updates to increase the value and salability of your home. These updates may include a bathroom remodel, new shingles, a paint job or some landscaping. There also may be essential items in your home that need repairing, such as your washer or furnace.

Car Repairs

Car repairs tend to get shoved to the back of the line when it comes to how to spend your money. As long as the car is still drivable, many car owners choose to wait to repair their car.

Credit Card Debt

Individuals and couples facing credit card debt often have a desire to get those cards paid off. A bonus can seem like the ideal time to pay off cards.
Deciding what to do with your bonus money can be hard. You may choose to spread the amount out between all five categories. However, if your goal is financial stability, here is the order these items should be paid.
1. Emergency Fund

This is essential because you never know when you will need it. If you have at least ,000 and are adding to it regularly, you don't need to put your bonus here. If you haven't reached ,000 yet, though, you must establish this immediately.

2. Car Repairs

If your car needs a major repair, do it now while you have the money. You may be tempted to pay off credit cards first, but think of what will happen if your car breaks down completely. You will be unable to go to work, and unable to make money to pay any bills, including credit cards.

3. Credit Card Debt

If you have a large amount of credit card debt, your car is running fine and you have an emergency fund, use your bonus to pay off your cards. The interest you are paying on your credit cards is money down the drain. Even though it may hurt to use your bonus to pay debt, remember that you are adding money into your monthly budget by doing so. If you pay off a ,000 card that requires a minimum payment of 0 a month, you are adding 0 a month into your monthly budget.

Home repairs are not needed by everyone, unless it is something essential to the running of your household. Cosmetic repairs and updates to make it sell are both things that can wait if you are swimming in credit card debt. Also, the extra money in your monthly budget can be put towards house updates.
Luxury items are nice but if you want to get on firm financial standing this year, leave this for last. If all other categories are already covered, feel free to splurge. If you are like the majority of Americans, though, you will have other, more essential, items to take care of before you can spend money on yourself.

No comments:

Post a Comment