Takeaways
- Bonus payments are cash payments made on a regular or semi-regular basis.
- Bonus payments can constitute a major part of an employee’s compensation.
- Spending your bonus payments wisely can accelerate your net worth growth.
- Bonus payments are taxed using the percentage or aggregate method.
- Bonus payments are made for meeting company milestones, hitting personal sales goals, or being rewarded for excellent performance.
What Is a Bonus?
A bonus payment is a lump-sum payment earned by employees outside of their regular salary. Depending on your role, bonuses can be a significant part of your annual compensation package and gross income. How you spend your bonus can determine your long-term financial health.
Bonus payments are included in your regular paycheck or distributed in an off-cycle paycheck. Many salaried employees receive an annual bonus, which is a percentage of their yearly salary, typically ranging from 10-50% of their salary. Sales or commission-based employees might earn a significant portion of their total cash compensation in the form of bonus payments.
Here are several types of bonus payments:
- Annual Bonus – Usually based on your individual overall and company performance for the calendar year.
- Quarterly Bonus – Typically awarded for reaching some performance-based milestone or company goal.
- Spot Bonus – One-time payments made to reward exceptional performance or extra effort.
- Commission Checks – Regular bonus payments are paid for achieving specific sales goals.
7 Smart Ways to Spend Your Bonus
How you spend your bonus payment can alter your finances. Here are nine healthy ways to leverage these lump-sum payments into long-term paydays.
1. Pay off High Interest Debt
Consumer debt can be a nagging problem if you don’t work to pay off all your debt. It can be the road bump that keeps you from starting to accumulate massive savings or investments.
Paying off high-interest debt can improve your net worth and give you peace of mind. Here are high-interest debt products you can pay off with a large cash payment.
- Credit Cards – Credit card debt is one of the highest APY debts around. The average credit card debt APY in Q3 2025 was 29.83%. Once you pay off your credit card debt, you should focus on only using one of the best credit cards.
- Student Loans – Most young professionals graduate from college or graduate school with a significant amount of student loans. These payments can eat into your new paycheck far more than you anticipated. That’s why it’s incredibly smart to start a budget.
- Car Notes – If you took out an auto loan to buy a new or used car, your monthly car payment might begin to weigh on your monthly cash flow. You can use your cash bonus to own your vehicle outright and eliminate a high-interest loan. Read about how to buy a new car.
2. Save an Emergency Fund
One of the most evangelized “must-have” savings accounts by personal finance experts is an emergency fund. An emergency fund is a savings account that holds at least $1,000 to $3,000 in cash to help blunt unexpected expenses.
Emergency funds allow you to absorb unforeseen costs, like medical bills, roof leaks, or car repairs, without having to use high-interest credit card debt to cover the cost. You can spend your bonus by filling up one of the best high-interest savings accounts with your emergency funds.
3. Fill Up Your Slush Fund
After you have contributed to your emergency fund, most financial experts advise you to increase your savings even more. That’s where a slush fund comes into play. A slush fund is a savings balance with at least three to six months’ worth of living expenses.
The idea for a slush fund is to distance yourself even further from financial uncertainty in case of involuntary loss of employment. It usually takes at least 90 days to find a new job, so three to six months of expenses will allow you to search for your dream job comfortably.
>> Plug and Play with our Slush Fund Calculator
4. Purchase Low-Risk Investments
Stashing away your cash in an investment right away can help you secure a path to financial freedom or help you meet your long-term financial goals. To grow your savings, you can quickly invest in one of the best low-risk investments.
Here are some low-risk investments to consider:
- High-Yield Savings Accounts – Savings accounts with high Annual Percentage Rates (APR) can give your cash a boost in earnings. These savings products have an APY that can fluctuate based on the banks. Here are our picks for the Best Savings Accounts.
- Certificates of Deposits (CDs) – CDs are savings products that offer a fixed rate of interest on your savings for a set term. Here are our picks for the Best Certificates of Deposits.
- Exchange Traded Funds (ETFs) – ETFs are a broadly diversified equity investment that lets you invest in a wide array of stocks, all at once. ETFs are known for their low-cost structure, leaving you with more of your earnings. Read about How ETFs Work.
5. Finally Start a Business
One of the fastest ways to start another income stream is to start your own business. Whether you are trying to turn a hobby into a profitable business or leverage your current skillset to begin freelancing, creating a business can be a significant boost to your income.
Starting a business can take time, but it can provide more income, personal flexibility, and equity ownership in a company. There are many ways to set up a company, from forming a C Corporation to an LLC. Your bonus payment could be the seed capital you need to get started, finally.
Read More: 9 Ways to Fund Your Startup
6. Max Out Your Retirement Accounts
Saving for retirement can be one of those things you put on the back burner until you realize you are way behind. You can utilize your bonus payments to get caught up or get ahead of the curve quickly.
If your company offers a 401(k) plan, you can use your bonus to quickly take advantage of your company’s matching contributions or even max out your annual 401(k) contribution limit. This will help you save on taxes and increase your total net worth.
You can also look into starting an individual retirement account with an online brokerage account. Based on your finances, it might make sense to make contributions to a Traditional IRA or a Roth IRA.
Read More: Average 401(k) Balance by Age
7. Buy Alternative Assets
Investing in alternative assets can also be a way to spend your bonus. While these investments are considered to be higher risk than most, they also provided the added benefit of more capital gains.
- Cryptocurrency – Digital assets like crypto (Bitcoin or Ethereum) have increased dramatically in value over the last decade. Many investors see the foundational technologies of these assets, like blockchain, as a path to a frictionless form of international payment systems. (Read more about Cryptocurrencies 101).
- Real Estate – If you don’t want to focus on new technologies, you can own assets like real estate: single-family homes, apartments, condos, or Real Estate Investment Trusts.
- Commodities – Financial advisors often advise clients, depending on their financial situation, to diversify their investments. Investing in commodities can be a smart strategy to give your investment portfolio the proper titration of exposure to these assets, like gold, silver, and copper.
2025 Bonus Tax Rates
Getting a bonus, whether expected or unexpected, can be an excellent day for you. However, it is essential to understand how bonuses are taxed and what you can do to prepare.
Before your bonus hits your bank account, your company will charge withholding taxes from your payment. The amount of your withholdings depends on how you filled out your Form W-4.
Companies use two main ways to calculate their bonus tax rate. Here’s how each method works:
- Percentage Method: Your bonus payment is calculated as supplemental income. Your withholding rate is based on what the Internal Revenue Service uses for supplemental wages, usually around 22% on bonuses less than $1,000,000.
- Aggregate Method: Instead of using a flat rate, your bonus is included in your regular paycheck. Your withholdings are calculated based on your ordinary income tax bracket.
>> Read more about How Bonus Tax Rates Work
Smart Summary
Bonuses are lump-sum cash payments that can significantly improve your personal finances. How you spend your bonus can determine if you will eliminate debt, start a savings fund, start investing for the first time, or focus on long-term savings like retirement. Bonuses can also be the capital you need to get a business off the ground or invest in yourself.
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(1) Last Accessed August 1, 2025.
(2) Last Accessed August 1, 2025.
