6 ways to use your annual bonus or raise

If you've received an annual bonus or raise after a year of going above and beyond for your job, congratulations on the well-earned pay bump. Chances are you'd like to use some of that money to enjoy yourself, and you should.

But putting some of the funds toward your financial future is also important. Otherwise, you might quickly spend all the extra money without even realizing it. If you're wondering what to do with a raise or bonus, here are six ways to put the money to good use.

1. Pay down debt

If you have any outstanding debt, your extra earnings could put a nice dent into it. You could allocate the bonus straight into paying off your debt, wiping out a chunk immediately. If you get a raise, you could increase your monthly debt payments, so you pay everything off sooner.

When paying off debt, consider the interest rate. Paying off high-interest-rate debt like credit cards and unsecured personal loans is a priority.

For example, the average credit card charges nearly 22% APR (annual percentage rate).¹ If you have $10,000 in debt, that's roughly $182 per month, or $2,200 a year in interest, and could grow larger. Knocking that out with your annual raise or bonus could buy budget breathing room as you stop losing money to interest.

2. Up your retirement contributions

Your annual raise or bonus could also increase how much you save for retirement. Retirement accounts like 401(k)s or individual retirement accounts (IRAs) could let you save with extra tax breaks.

How close are you to maxing out your accounts? For 2025, you can save up to $7,000 in an IRA if you are younger than 50 and up to $8,000 if you are 50 or older.

If you have a 401(k) at work, you could save up to $23,500 if you are younger than 50, up to $31,000 if you are between 50 to 59 or 64 or older, and up to $34,750 if you are between 60 to 63.²

If you received an annual bonus, you could look into making a one-time large deposit into either your 401(k) or IRA, giving you a head start on retirement investing for the upcoming year.

If you received a raise, consider increasing your monthly contributions to retirement accounts. For a 401(k), you'll need to increase the withholding from your paycheck. Ask your HR department or 401(k) administrator or login into your account online to bump up your contributions into the plan. For an IRA, you likely transfer money from your bank account, so simply contact your financial advisor or access your account online to increase the amount for future contributions.

3. Increase your savings

IRAs and 401(k)s can help you put money aside for retirement, but you might have other financial goals such as building up a home down payment, buying a new car or adding to your emergency fund for future unexpected bills. A good rule of thumb is to save in your emergency fund around three to six months' worth of expenses.

With these goals in mind, you could use your annual raise or bonus to increase how much you have in savings, whether through a one-time deposit or monthly contributions. Consider where you keep the money for long-term savings. A high-yield savings or money market account may earn more interest than a checking account and still allow you to make withdrawals.

4. Save for educational goals

If you'd like to put your children or another family member through school, your annual raise or bonus could get you one step closer to that goal.

College savings accounts can help you prepare for this upcoming cost. A 529 plan, for example, allows you to invest with tax-deferred growth. When used for qualified college expenses, withdrawals are not subject to federal tax and, in many cases, there's no state income tax.

Combining your annual bonus or raise with these tax advantages can be a smart way to help you reach your college savings goals. It's a good idea to speak with your financial or tax professional about your specific situation to ensure your making informed decisions about 529 plans.

5. Invest in personal growth or well-being

Consider using the money for personal growth or care. For example, you could use the annual bonus or raise to pay for night classes to get another degree, study new skills or even create your own business.

Investing in yourself also means taking care of yourself. Some of that money could go toward a nice vacation in the new year. You've earned it as part of your hard work for the raise or bonus.

6. Consider alternatives

Looking for a few other options for what to do with an annual bonus or raise? If you're saving for something several years down the road, you could invest through a taxable brokerage account.

You'll owe income tax on any realized investment gains each year, but there are no restrictions on when you can take the money out or how you can spend it. You could take the money out when you want for whatever you want. Of course, unlike a savings account, investing has risks and returns are not guaranteed.

If you have a high-deductible health insurance plan, you'd owe considerably more out-of-pocket when you need health care. A Health Savings Account (HSA) allows you to put money aside now for an upfront tax deduction. Future investment earnings are tax-deferred, and the withdrawals are tax-free if you spend the money on qualified health care expenses.

If you receive a raise, consider increasing the amount that's deducted from your paycheck into your HSA. Keep in mind you can change your contribution at any time, not just during open enrollment.

Finally, you could consider giving some of the money away to charity. You could potentially qualify for an extra income tax break while doing good for the world.

A Citizens Wealth Advisor* can help you plan for the road ahead

No matter how you choose to use your annual raise or bonus, it's important to make choices that align with your long-term financial goals. A Citizens Wealth Advisor can help you balance your short-term goals with investing for your future so you can feel confident about the road ahead. Contact a Citizens Wealth Advisor today for a personalized financial plan that fits your unique goals and situation.

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