Investing bonuses and other unexpected payments: using additional payments to build wealth

Bonuses at Christmas or really any time throughout the year are a great opportunity to improve your finances. Instead of simply spending them, you can use them to reduce debt or build wealth over the long term. Which of these options is right for you depends on what your current financial situation looks like and when you will need to access the money.  

Pay down debt before building wealth

Check any debt you have before investing. You can’t reliably predict the yield from an investment, but interest paid on debt is set in stone. Paying down debt can therefore make more sense than investing in parallel to a loan. So check if your loan allows for unscheduled repayments and what the conditions are. At that point, if you already have a healthy emergency fund, you can focus on building wealth.

Of course, if the loan has a long term, for example a mortgage, the calculation is a little more complex. Whether to use extra money to pay down the loan or to invest will depend on the lending rates, the potential risks and yields and your own personal risk tolerance. Making this decision will require a good understanding of the opportunities and risks involved.

Invest your money over the long term

If you are not going to need your bonus any time soon, it might be a good idea to invest it on the capi-tal markets. One option is a diversified fund or ETFs. But remember: the greater the potential yield, the higher the risk. Prices can vary and, even in a long-term investment, end up lower than the original pur-chase price. It’s important to make sure that the investment term and risk match. If the bonus was for a lot of money, you also have to decide if you want to invest it all at once or slowly over time.

Savings scheme vs. one-time investment

If you invest all your money at once, prices could potentially drop soon after. With a savings scheme, you spread your investment out over time.

You invest the same amount monthly, receiving more shares when prices are low and fewer when prices are high, due to fluctuating share prices on the market. This is known as the cost-average effect, and can help avoid the search for a supposedly perfect moment to invest. However, even investing in this man-ner does not guarantee returns.

Capital-forming benefits: money from your employer 

Don’t forget that in Germany, your employer may offer vermögenswirksame Leistungen (capital-forming benefits) to help you build wealth. Your employer helps you to save using a savings scheme specifically set up for the purpose. Whether or not your employer offers such a scheme, and how much they con-tribute, will depend on your current employment or pay agreement. Depending on your personal situa-tion, you may also be able to receive government funding in addition to what your employer contrib-utes. So it’s worth taking a look at your employment contract, pay agreement or pay slip.  

Use bonuses to boost your retirement fund

If your financial foundation is secure, you could also look into improving your retirement fund. Focus on more than just potential funding or tax benefits. Make sure you are also examining the costs, potential yield, risks and availability of the money.

The new government funded Retirement Savings Account will provide new options starting in 2027. If you want to make a long-term investment for your retirement using bonus money, you should take the requirements for state funding of your private pension into account and compare offers from banks and other providers. (LINK: Verbraucherartikel Altersvorsorgedepot in English)

Check your finances as soon as you receive a bonus: what is the best way to use the money in your cur-rent situation? Doing a quick budget check will ensure that you don’t just spend your bonus money on day-to-day expenses, but instead use it to help achieve your financial goals. The following bonuses or unexpected payments might be available to you:

• Christmas bonus
• Holiday allowance
• Bonus and premium payments
• Profit-sharing schemes
• Capital-forming benefits
• Tax refunds
• Paid overtime
• Gratuities
• Inheritance