Apply All Your Bonuses To Principal When You Have High-Interest Debt

Apply All Your Bonuses to Principal When You Have High-Interest Debt

Tough talk time: Bonuses feel really great when your job doles them out. They may even be a nice reprieve from otherwise stressful budget constraints. But if you're in debt and you spend a bonus on something else, you're usually hurting yourself.

Picture: Frédéric Bisson/Flickr

While there are certainly some exceptions (using bonuses to pay for necessary medical expenses or unexpected repairs, for example), generally speaking, bonuses are outside of your normal budget and should be treated as such. If you're carrying high-interest debt, such as a credit card balance, putting a bonus towards the principal (as opposed to eating out or indulging in a luxury purchase) can drastically reduce the interest you pay. As personal finance blog Money Ning explains:

This was probably the most difficult step of all, because I was looking forward to the day when I could enjoy extra money earned from pay increases or overtime. But instead of giving in to temptation, I paid down debt. And for those months with an extra week, I also kissed the money goodbye as soon as it arrived in my bank account.

Giving up your bonuses to paying down debt is probably one of the biggest financial drags in adulthood. It's also one of the best ways to save yourself money in the long run. Particularly if you're carrying a high balance. It may suck, but you'll feel a lot better when the credit card is paid off and your next bonus is pure profit.

The 5-Step Plan I Used to Get Out of Debt [Money Ning]


Comments

    I did exactly this a few years ago. Took a couple of bonuses to eliminate the debt but it was a real turnaround in my personal finances.

    i have a free redraw style home loan, everything i get extra goes straight into the home loan and i have a sticky note that has the total of all of these extras stuck to my monitor. when i have some extra gadget or whatever that i can't afford just off of what's left after bills and loan payments i just pull out some of this "free" money and buy it, so far i think 70% of it is still in my loan and i've saved myself several dollars of interest by having the other 30% in there.

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