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You just got your end of year bonus and you're already dreaming of ways you can spend it. A vacation in Italy sounds nice or maybe you're hoping to get your hands on the latest iPhone. Getting a bonus can feel like you're getting extra money that you can spend freely. However, it's more financially savvy to help grow that sum of money into something even bigger. Here are five ways to make the most of your end of year bonus.

1. Invest in Your 401(k) Plan

The key to growing your end of year bonus is to think long-term, not short-term. When you're young it can be difficult to think about retirement, but saving more now can help build your nest egg and set you up for success in the future. One of the best things you can do is invest in your 401(k) plan. And if your company offers a match, even better! Be sure that you understand the differences between traditional and roth 401(k) plans. Contributions for traditional 401(k) plans are pretaxed and when you make a withdrawal, they're taxed as regular income. For roth 401(k) plans, contributions are made after taxes and there are no taxes on withdrawals.

2. Invest in an Individual Retirement Account (IRA)

Aside from investing in your employer-sponsored retirement savings plan, you may also consider investing in an IRA. You can choose from a Traditional IRA or a Roth IRA — each has their own unique tax advantages. When you invest in a Traditional IRA, you may be able to deduct a portion of your contributions. By investing in a Roth IRA, your withdrawals are tax-free.

3. Invest in Low-cost Index Funds

Do you want to build wealth like Warren Buffett? Then take a tip from him and invest in S&P 500 low-cost index funds. According to CNBC, in the past 90 years, the S&P 500 index has had an average annualized total return of close to 10 percent. This is a great way to grow your money with an eye on the long-term.

4. Pay off Debt

Are you still trying to pay off student loan or credit card debt? Then putting your bonus toward debt can help grow your money because paying off debt is a guaranteed return on your investment. You'll pay less in interest and free up more of your cash once it's paid off. Focus on the high-interest debt first to get the most bang for your buck.

5. Invest in Yourself

When it comes down to it, you are your biggest asset. You can grow your bonus and use it strategically to build a side business or focus on continuing your education. For example, you can sign up for a coding class to boost your skills or fund a side hustle on eBay. Using this money to further your goals and education will always pay off and reap dividends in the future.

Bottom Line

Getting an end of year bonus can be exciting, but it's also very tempting to go on a spending spree with your newfound money. Instead, consider using it to increase your assets and provide more opportunities in the future. Money is all about choices and leveraging your bonus in these five ways can open up more possibilities.

This information and recommendations contained herein is compiled from sources deemed reliable, but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or is offering any tax, accounting, or legal advice.

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