Are you expecting a year-end bonus? If so, you’re probably dreaming up all the ways you could spend that windfall.

The average bonus was $2,447 in December 2023, according to payroll company Gusto. That’s a sizeable chunk of change — one that could put you in a better place financially in 2025 with proper planning.

If you expect a bonus to land in your account soon, it may be tempting to splurge. And that’s perfectly fine. After all, you deserve a reward after working hard all year.

However, before you make an impulsive purchase, consider a few ways you could use those funds to improve your financial situation.

In today’s high interest rate environment, it’s expensive to carry debt. And the higher the interest rates you’re paying, the faster that debt balance can grow.

So, consider using your end-of-year bonus to pay off some of your debts. Not only does this clear your balance faster, but it also saves you money in interest over time.

For example, say you have $3,000 in credit card debt at 21% APR. If you took 12 months to pay off that debt, you’d pay $279 per month and spend about $352 in interest (assuming you don’t make any new purchases on the card).

Now let’s say you receive a $2,000 bonus and use it to pay down your credit card balance to $1,000. In this case, you’d only need to pay $93 per month to eliminate your balance in one year. And you’d pay just $117 in interest — a savings of $235.

Read more: What’s more important: Saving money or paying off debt?

If you’re not sure what to do with your bonus money, you shouldn’t feel pressured to use it right away. You can set it aside in a bank account while you decide. However, if your money is going to sit in the bank, you should at least earn interest and help it grow without any work on your part.

Following the Federal Reserve’s recent rate cuts, deposit account rates are on the decline. Still, there are plenty of high-yield savings accounts, money market accounts, and certificates of deposit (CDs) that pay upwards of 4% APY (or even more). Take some time to compare today’s rates and account options and put your bonus in an account that will help it grow.

See our picks for the best account options today:

It’s important to have a financial safety net in the event of a financial emergency, such as a car repair or job loss. An emergency fund can help you keep your budget intact and avoid taking on new debt to cover a surprise expense.

It’s typically recommended that you keep enough money in your emergency fund to cover three to six months’ worth of living expenses, though you might need more in certain situations. If you don’t already have an adequate emergency fund in place, a year-end bonus could help you get started.

Read more: How much money should I have in an emergency savings account?

One of the best things you can do for Future You is invest for your golden years. In particular, retirement accounts such as 401(k)s and IRAs are a good option because you can contribute pre-tax dollars, which allows you to lower your tax bill in April (or get a bigger refund), as well as defer taxes until you make withdrawals.

For the 2024 tax year, you can contribute up to $23,000 in a 401(k), and an extra $7,000 if you’re age 50 or older. If you haven’t prioritized saving for retirement in the past, or you want to take full advantage of an employer match, you can ask your payroll department to direct some or all of your bonus to your account.

Read more: 401(k) vs. IRA: The differences and how to choose which is right for you

As we mentioned, there’s no harm in splurging once in a while, as long as your financial obligations are squared away.

If you don’t want to feel like you’re depriving yourself, set aside half of your bonus for a “responsible” purpose and use the other half however you’d like. This can give you the momentum you need to stay the course when it comes to your financial goals, while still enjoying the fruits of your labor.

Read more: How much of your paycheck should you save?

Paying off student loans can seem like an impossible task, especially when high interest rates mean loan amounts keep increasing. But student loan relief can provide a lifeline for borrowers in need.

Learn More: I’m a Retirement Planner: 7 Ways I Am Guiding Clients Now That Trump Won

Discover More: How To Financially Plan for the New Year Under the New Trump Presidency

A 2024 survey by the Consumer Financial Protection Bureau revealed that nearly 61% of borrowers who received debt relief reported the relief gave them the opportunity to make a beneficial change in their life sooner than they otherwise could have.

But with President-elect Donald Trump poised to take office in January, existing student loan relief programs are in jeopardy, meaning borrowers could face substantial changes to their monthly payments and their student loan debt.

In August 2022, the Biden-Harris administration launched the Saving on a Valuable Education (SAVE) plan to help borrowers better manage their student loan payments. This income-driven repayment plan offers several benefits to borrowers:

• Loan payments are calculated based on a borrower’s income and family size, rather than basing payments on their loan balance.

• Qualifying borrowers’ remaining balances can also be forgiven after a certain number of years.

• Many borrowers’ monthly payments are reduced, and some borrowers don’t owe monthly payments at all.

• If borrowers keep up with their monthly payments, the Department of Education won’t charge monthly interest that isn’t covered by the payments, so borrowers’ balances will decrease, and they can more easily pay off the loans.

While on the campaign trail, Trump called President Joe Biden’s planned student loan forgiveness “vile,” blaming student loan relief for increasing the federal deficit.

Check Out: How To Financially Plan for the New Year Under the New Trump Presidency

Bill Townsend, founder and CEO of College Rover, predicted that Trump will end the SAVE plan as part of a concerted effort by many conservatives to change the appeal and direction of college education.

“Interestingly enough, there is a contractual law issue that will arise from public servants who were contractually bound to certain jobs in exchange for student loan forgiveness,” Townsend explained. “Assuming SAVE, which included this preexisting loan forgiveness contract, is voided, there will be the potential for a class action lawsuit against the U.S. government.”

However, Townsend predicted that Trump could void the lawsuit with an executive action.

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MicroStrategy has raised almost $20bn from investors this year to buy bitcoin, fuelling a meteoric rise for the once-obscure software company into the Nasdaq 100 index of large-cap US technology stocks.

A combination of selling shares and convertible bonds has funded a one-way bet on a rocketing bitcoin price that, despite a sell-off in recent days, has driven its shares up more than 400 per cent this year. Such is the investor demand that the company now has a market value of around $80bn, despite owning around $41bn of bitcoin.

Debt fund managers have been clamouring to get their hands on the convertible bonds, believing they offer exposure to the soaring share price while also providing protection if the price goes into reverse. The stock’s Nasdaq 100 inclusion will compel index-tracking funds to buy billions of dollars more of the company’s shares.

Its index inclusion after the close of trading on Friday — it is part of a trio replacing IT firm Super Micro Computer, Covid-19 vaccine maker Moderna and gene-sequencing company Illumina — is further vindication for founder Michael Saylor, who has become one of the most evangelistic proponents of bitcoin since his company began buying it four years ago.

“It’s some incredible financial engineering,” said a convertible bond portfolio manager invested in MicroStrategy. “[Saylor has] created this incredible situation where a stock trades at three times the price of the underlying bitcoin and then he just sells more shares every day and buys more bitcoin.”

For Saylor, who once tweeted that bitcoin’s “days are numbered” but later recanted, this year has been an extended opportunity to build on his plan to make MicroStrategy a “treasury” for what he calls “the most valuable asset in the world”. In October he announced plans to raise $42bn over the next three years, all to pay for more bitcoin.

The cryptocurrency’s value has more than doubled this year following the arrival of spot bitcoin exchange traded funds in the US and Donald Trump’s presidential election victory in November. Trump’s promises to make the US a “bitcoin superpower” and ease the regulatory crackdown pushed the value of the coin from less than $64,000 at the end of September to more than $108,000 this week, although at one point on Friday it fell close to $92,000.

“My attitude [on bitcoin] has gotten better every quarter,” Saylor told the Financial Times. “Now you have a president[-elect] who is ending the war on crypto.”

MicroStrategy’s success has been helped by the huge premium that investors place on its shares, with the company currently trading at roughly double the net asset value of its bitcoin holdings.

This allows it to issue stock at a premium and buy ever more of the cryptocurrency. Although existing shareholders end up owning a smaller percentage of the company, the underlying value of their shares increases because MicroStrategy now owns more bitcoin per share.

Convertible bonds have also become a key way for MicroStrategy to raise money. Such instruments usually pay a fixed coupon but also convert into shares at an agreed price, allowing investors to benefit from equity’s unlimited upside while providing the perceived downside protection of bonds.

The highly volatile nature of the stock has so far worked well for both the company and investors. It means the company can issue bonds with a higher conversion premium than usual and even offer zero coupon on the debt. Investors, meanwhile, have been drawn to the potential exposure to the firm’s soaring share price and the perceived downside protection.

As MicroStrategy’s shares surged earlier this year, bond investors who had lapped up its March convertibles quickly became equity holders as their bonds were converted. In November, Saylor returned to market for the fifth time this year, issuing $3bn of convertibles for zero interest and a 55 per cent conversion premium.

For investors who had snapped up MicroStrategy’s earlier debt, the company’s return to market could hardly have worked out better, as it allowed them to take profits on their shares and buy new bonds.

“This was an absolute home run for us. We got to lock in all of the upside of the past six months, and now we bring in downside protection,” said one convertible bond fund manager who owns MicroStrategy bonds. “There is no better outcome for a convertible bond manager.”

So-called convertible arbitrage hedge funds, which buy such bonds and then short the shares — bet on a falling price — have also provided a ready market for the firm’s mass issuance.

Their strategy is essentially a bet on volatility. They try to make money on their short position if the share price falls, with losses on the convertible limited by the bond’s downside protection. And if the shares climb, the aim is for the short position — which is smaller than the convertible bond exposure — to lose less money than the gain on the equity upside.

“It’s arbitrage feeding arbitrage,” said one convertible bond trader who has bought MicroStrategy’s bonds and shorted its equity. “Our arbitrage is OK. It’s decent. But [Saylor’s] arbitrage is brilliant.”

Traders exploiting the volatility of MicroStrategy’s shares have been helped by billions of dollars of inflows into highly levered exchange traded products that track the stock but amplify investors’ potential gains and losses. Two MicroStrategy ETFs, including the Defiance Daily Target two-times long MSTR ETF, own about $10bn of the company’s stock via swaps and options. 

Unlike traditional ETFs, which buy and hold shares, leveraged ETFs rebalance at the end of every trading day to hit their targeted returns. This means that when the underlying asset rises in price, fund managers must buy more of the stock, and vice versa should prices fall.

These end-of-day rebalancing flows can “significantly impact the underlying MicroStrategy stock price, amplifying price moves, thus enhancing volatility”, said JPMorgan strategist Nikolaos Panigirtzoglou.

But some investors are getting nervous. They fear that the virtuous circle that has driven up the share price so quickly could easily go into reverse if the bitcoin price falls substantially.

“Borrowing dollars to buy bitcoin is just a massive dollar short position, not a new financial invention,” says Barry Bannister, chief equity strategist at Stifel. “As any short seller in history knows, the price of being wrong is ruin.”

“If bitcoin traded down 90-95 per cent and stayed there, there would be no liquidation or debt accelerations,” Saylor told the FT. “Presumably our equity would suffer some dilution, but we still would not sell, or need to sell, our bitcoin.”

The shares could also fall if investors simply decide to place less of a premium on MicroStrategy stock. Since their peak on November 21, the shares are down around 40 per cent, while bitcoin is down just 5 per cent.

One North American hedge fund executive said they had held a position in bitcoin and a bet against MicroStrategy “to capture that spread”. This bet “worked on and off until the trade became a meme”, added the person, who now prefers to short one of the twice-leveraged ETFs.

Some suggest that share sales by insiders undermine the company’s pitch to investors: that bitcoin remains undervalued. MicroStrategy directors have sold a total of $570mn of the company’s stock so far this year, according to company filings.

MicroStrategy did not respond to a request for comment on the share sales.

“The subjects change — now it’s crypto — but over the centuries human investment behaviour does not deviate from the script one iota,” said Bannister.

Anyone buying assets “built on thin air” should be prepared to watch their money “vanish”, he added.