For those lucky enough to get a bonus this year, Justmoney offers ten tips on what you should do with it. While it is nice to spoil yourself and your loved ones, it is important to put some aside for important expenses or future financial needs.
Estelle Scholtz-Mare, of Momentum retail brand and marketing, notes that 2016 was a tough year financially. “We need to think differently about our money in order to survive. Once you’ve taken your expenses into account, proportion your bonus according to debt, savings and spending, retirement and emergency funds.”
“We all have long-term goals and dreams, but in the short term we often fail to take the action that will lead us to achieve them. This is particularly true when it comes to our finances. And, with the holidays upon us, we may be tempted to take action that could distract us from achieving our financial goals by spending frivolously,” says Bekithemba Mafulela, business development manager at Allan Gray.
Sue Torr, MD of Crue Invest emphasizes that your short-term decisions can have lasting effects on your 2017 financial health. “Be prudent about allocating your bonus or thirteenth cheque, regardless of the size of your bonus.”
10 Financially savvy ways to spend your bonus
Torr highlights that allocating bonus requires an honest assessment of what is important to you. Finding the balance between what you desire in the present and what you genuinely yearn for in the longer term is what you need to base your decision on.
- Pay off short term debt
Scholtz-Mare advises using a sizable portion of your bonus to pay off short-term debt that you may have, or at least pay something towards the outstanding balances. This includes things such as credit cards, store cards and personal loans. “These are the most expensive, and should therefore be paid off first. If you can, consider using your whole bonus to pay off this type of debt — it may be difficult, but just think how much extra you’ll save every month if you don’t have to pay off expensive debt,” says Scholtz-Mare.
It is important to note that when paying off this debt, you should try to avoid incurring it again in the New Year. According to Scholtz-Mare, one of the biggest mistakes that people make is to pay off debt with their bonus, just to access it again the next year. “If you cannot help yourself to stay clear from accessing the credit again, forego store cards and credit cards if possible.”
- Put money into your home loan
Scholtz-Mare suggests that if you don’t have high-interest short-term debt, you should put your bonus into your home loan. This will reduce the outstanding balance, which will reduce the interest charged and the number of years that it will take to pay the home loan off. “This has two benefits: paying off your loan sooner and saving on the interest expense over time.”
- Pay for annual upfront expenses
Some service providers offer discounted fees when accounts are paid upfront for the year. Torr notes: “Many schools, clubs and gyms provide significant discounts if fees are paid in January for the entire year. Although you might balk at the idea of paying a huge upfront instalment, especially in December when expenses are higher than normal, your monthly financial commitments for next year will be significantly reduced, making next year’s financial demands a little easier.”
- Prepare for increased expenses
It is a sad fact of life that the cost of living continues to rise. Mafulela notes that over the long term the risk of inflation eroding the buying power of your money is probably greater than the risk of volatility of the markets, which tends to be a shorter-term phenomenon. “Consumables and certain possessions, such as cars, do not protect you as these tend to lose value over time. The rising cost of living is a real issue and should be considered when planning for the future.”
Scholtz-Mare says: “With inflation and the cost of living rapidly increasing, you could use your bonus to settle one-off costs so that they don’t form part of your monthly budget. For example, your child’s school will most likely give you discount on your annual fees if you pay it upfront for the year. Or you could set aside part of your bonus for your car’s annual service and maintenance costs. These things might make a huge difference on the stress that some people have to balance their monthly budget.”
In addition to preparing for any price increases you may have to battle with over the coming year, also keep in mind other expenses that may arise. For example, Torr advises making a list of next year’s expenses, such as school tours, orthodontic work or new tyres for your vehicle, and consider carefully how you will fund these.
- Savings and retirement funding
For many this is easier said than done, but if you receive a bonus, a portion of it should be put into savings. This can include long-term and short-term savings goals. For example, school fees for the coming year, or home maintenance that may be needed in 2017.
Your long-term savings will include planning for retirement, as well as having access to money for unforeseen expenses and emergencies. Scholtz-Mare points out that funds for retirement and emergencies should always be separate. “It is a golden rule to never touch your retirement funds before you actually retire.”
Torr reveals that legislation recently changed to allow employees to invest up to 27.5% of their income towards a retirement annuity on a tax-free basis. Being able to invest with pre-tax money is a significant benefit that can make a huge difference to your retirement funding. She notes that Crue Invest encourages people to maximise their RA contributions before the end of the tax year in February 2017. Setting aside some of your bonus for this can really boost your retirement savings.
Scholtz-Mare says: “Part of looking after your future is building an emergency fund. If you don’t have an emergency fund, now is a good time to start one using part of your bonus. This is basically a savings fund that you use to pay for emergencies – for example, the excess payment due on your insurance policy when you make a claim. Ideally, you should have the equivalent of three to six months of your net salary in your emergency savings fund. If your bonus is not sufficient to cover this amount, use this as a good opportunity to start an emergency fund.”
Mafulela stresses: “It is important to carefully research the investment options available to you and choose one to suit your time horizon, return objectives and your ability to stomach uncertainty or ups and downs in returns over different time periods. If you need help making financial decisions you should consider using an independent financial adviser.”
- Open a tax free savings account
A tax free savings account is a good investment tool, and the benefit is that you do not pay any tax on the interest earned, unlike some other savings vehicles. A tax free savings account allows you to invest up to R30, 000 per year, with a maximum life-time investment amount of R500, 000. “Investors do not pay tax on any interest or dividends earned by the investment and no Capital Gains Tax (CGT) is paid on withdrawal,” says Torr.
For more information on tax free savings accounts, click here.
- Invest in yourself
One way to spend your bonus is to invest it in yourself. Torr advises using part of your bonus for your personal development. This can include a range of things, such as paying for a photographic course, registering to study online, or registering to learn another language. “Personal fulfilment is essential to happiness, and any money channelled in this direction is well spent.”
- Planning a holiday
This is an expense that needs to be carefully considered. While it may be nice to get away after a long year of work, you need to be honest with yourself as to whether or not you can afford this, even with your bonus. For most people, 2016 was a financially challenging year, and as such, it is important not to spend money that you don’t have, and rather spend your bonus on reducing any debt you may have accumulated.
“I have the general feeling that it will be a low key Christmas and a lot of people will not go on holiday. This year has been tough on most families. Regarding going away for holiday – consider the extra money you will spend and if it might be wiser to rather provide a buffer for 2017,” adds Scholtz-Mare.
- Give to charity
Over the festive season especially, the needs of others come to the fore. Why not be selfless and contribute a portion of your bonus to a charity that is close to your heart?
Torr says: “Whether it’s donating to the Santa Shoe Box project or supporting your local Christmas charity, giving selflessly to those less fortunate than ourselves reinforces our humanity and is very much-needed, particularly over the festive season.”
10. Spoil yourself
While spending your money wisely is vital, it is also important to spoil yourself every once in a while, after all, you worked hard for your money. Torr notes that sometimes hard work comes at a great personal sacrifice, and as such you should “be kind to yourself and set aside some money for something or an experience you have yearned for.”
Mafulela adds: “Changing your financial behaviour, especially during the festive season, may have far-reaching consequences on your pocket down the line.”
Handy tip: Looking to invest your bonus this year? You can apply for a unit trust on Justmoney.