Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
Should You Invest Your Christmas Bonus? 4 Smart Ways to Use Extra Cash
Ruby Layram
27th Dec 2024
The Christmas bonus – that extra cash that seems to appear just when you need it most, amidst the holiday rush and splurges.
It’s tempting to splurge on that designer handbag, a fancy gadget, or maybe even a holiday escape to Bali. But before you hit “add to basket,” let’s take a moment to think: could this bonus be the start of something much smarter?
In this guide, I’ll weigh up whether you should invest your Christmas bonus, explore beginner-friendly investment options, and offer ideas for using your money wisely if investing isn’t on the cards. So, put the mulled wine down, and let’s take a look.
Assess Your Financial Situation First
Before you start dreaming about stocks and bonds—or panicking about whether you’re making a mistake—take a beat to review your financial health.
You wouldn’t jump into a swimming pool without checking how deep it is, right? The same goes for your finances.
Ask yourself these key questions:
- Do I have any debt?
High-interest debt, like credit cards or payday loans, should be your first priority. Paying those off is effectively giving yourself a guaranteed return on your money—often better than any investment can offer. - Do I have an emergency fund?
If you don’t have at least three to six months of living expenses tucked away, it’s worth considering building that buffer first. Life’s full of surprises, and not all of them are wrapped up under the tree. - What are my financial goals?
Are you saving for a house deposit, planning for retirement, or dreaming of a big trip? Your goals will guide how you use your bonus.
Once your financial foundations are secure, you can start looking at investing or other productive uses for your bonus.
When You Should Invest Your Christmas Bonus
If your financial ducks are in a row—debts paid, emergency fund healthy, and a clear plan for your money—then investing your Christmas bonus could be a brilliant move.
Here’s why:
- Compound growth is your best friend. Imagine your bonus as a tiny snowball at the top of a hill. Invest it wisely, and it could grow into an avalanche of wealth over time.
- You’re already living without it. If this money wasn’t part of your regular income, you’re unlikely to miss it. That makes it perfect for long-term investments.
But investing isn’t just about the potential rewards; it’s also about timing and strategy. If you’ve been considering dipping your toes into the world of investing, a bonus can be the perfect way to start.
When You Shouldn’t Invest Your Christmas Bonus
Investing isn’t for everyone—or every situation. Here are a few red flags that might mean it’s better to hold off:
- You’re carrying high-interest debt.
Paying off a 20% credit card interest rate will save you more money than most investments can earn you in a year. - You’re feeling unsure or overwhelmed.
If you’re not confident about where to start, there’s no harm in parking the money in a savings account until you’ve done your homework. Informed investing is always the best way forward – there is no rush! - You need the money in the short term.
Investments are for long-term goals. If you’ll need this cash for a holiday or house move in the next year or two, keep it accessible. Only invest with money that you won’t need for the next 12 months.
4 Beginner-Friendly Investment Options to Consider
If you’re ready to take the plunge and start investing, here are some beginner-friendly investment options that are perfect for putting your bonus to work.
1. ETFs and Index Funds
Think of these as the “starter packs” of investing. Exchange-Traded Funds and index funds let you invest in a broad range of companies without having to buy multiple assets.
When you invest in these products, you buy shares in a fund that tracks a stock market index, like the FTSE 100.
ETFs and Index Funds are popular due to low fees and easy diversification. Plus, you don’t need to be a financial whiz to get started!
Furthermore, funds tend to perform in line with the wider stock market, which makes them relatively reliable (although not risk-free!). If you’d invested £1,000 in an FTSE 100 index fund 10 years ago, you’d now have around £1,679 now (based on performance over the last 10 years).
Now, imagine if you had kept topping up your investment each year. Not bad for a hands-off approach!
2. Dividend stocks
Dividend stocks are like a gift that keeps on giving (name a better thing to invest in at Christmas?!). These are shares in companies that pay you a portion of their profits regularly.
When you invest in companies with a history of paying dividends—like Unilever or British American Tobacco—and they send you a slice of their earnings every quarter.
Here are my top 8 dividend-paying stocks as an example.
Dividend stocks are a great way to invest because you can earn passive income while your investment potentially grows in value.
3. ISAs (Individual Savings Accounts)
If you’re in the UK, an ISA is a tax-efficient way to invest your money. There are several types of ISAs that you can choose from, but the best way to dip your toes into investing is to opt for a stocks and shares ISA.
You can invest up to £20,000 a year in a Stocks and Shares ISA, and any returns are tax-free.
Much like ETFs, stock and shares ISAs allow you to diversify your investments without needing to buy multiple assets. Instead, your money is distributed between a basket of assets based on your risk tolerance and goals.
Stocks and shares ISAs are ideal for long-term goals, like retirement or a house deposit.
4. Bonds
For those who prefer a more cautious approach, bonds could be a good option to consider.
When you invest in a bond, you lend money to a government or company, and they pay you back with interest – which can turn into a source of passive income!
Bonds are typically less volatile than stocks, making them a safer option for risk-averse investors.
Smart Ways to Use Your Christmas Bonus Without Investing
If investing doesn’t feel right for you, there are still plenty of smart ways to make the most of your bonus.
1. Top up your savings
A solid savings account might not offer the same growth as investments, but it provides peace of mind and easy access to your cash.
Try to find a savings account that offers a competitive interest rate and flexibility. For example, the Lloyds Loyalty Saver account offers 5.25% interest and the flexibility to withdraw cash at any point, without charge.
2. Invest in yourself
Another great way to use your bonus is for personal growth, like taking a course, starting a side hustle, or buying equipment that could increase your earning potential.
For example, educational courses can help you to develop skills that could open doors to higher earning opportunities or promotions at work.
These kinds of investments usually pay off in the long run. Before investing a significant chunk of cash into personal growth, I recommend doing a b it of research to make sure that the investment will be worth it!
3. Give back
Donating to a cause you care about can be incredibly rewarding (especially at Christmas time!). And if you’re a UK taxpayer, don’t forget to tick the Gift Aid box to make your donation go further.
How to Avoid Impulse Spending
Let’s face it: extra cash has a funny way of burning a hole in your pocket. To avoid blowing your bonus on things you’ll regret by January, try these tips:
- Wait 48 hours: Before making a big purchase, give yourself a couple of days to decide if it’s worth it. If you forget about it hours after seeing it, you probably don’t really want it!
- Create a wishlist: Prioritise what you want to spend your money on, and stick to it. Make a grocery list for your personal expenses!
- Set limits: Allocate a portion of your bonus for fun and the rest for something productive. This is a great way to reward yourself whilst staying smart with your money.
Next Steps
Your Christmas bonus is a great opportunity to improve your financial future—if you use it wisely. Whether you choose to invest, save, or spend it on personal growth, the key is to have a plan.
Remember, there’s no one-size-fits-all answer. The best choice for you will depend on your financial situation, goals, and comfort level. So take a moment to reflect, do your research, and make a decision you’ll feel good about well into the New Year.
Your money is at risk.
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