As the year comes to an end, many of us are eagerly waiting in anticipation for our annual bonuses. But how many of us actually plan to use the money effectively? South Africans should spend as much time planning for their year-end bonuses, as they spend on planning holidays and travel.
According to Hedley Lamarque, financial planner at BDO Wealth Advisers, planning and budgeting during this period is imperative, “as this will guide you on how to best spend your bonus. It is important to have a proper plan and budget at all times, and not just at bonus time; as this will show you whether you are spending beyond your means, and what you can do to rectify the situation.”
In Lamarque’s career, the lessons he has learned are nuggets of gold. “The lessons depend on each person’s circumstances. When I was younger and had a lot of debt, the best thing I did with my bonus was to forgo short term ‘luxury’ items, and settle as much debt as I could; especially the more expensive debt, such as credit card debt,” says Lamarque.
“This has huge benefits later in life, as once you can eradicate debt, the bank can start paying you income on your money instead of the other way around.”
According to The World Bank, South Africans were reported as being the biggest borrowers around the globe last year. One of South Africa’s issues is that people are not saving or investing enough, and even more importantly, people are not putting enough away towards retirement; which obviously puts a strain on the government. Therefore if bonuses are wasted as opposed to being spent, either on reducing debt or making wise long-term investments, then this has a detrimental effect on the economy.
Nevertheless, making the decision to pay off one’s debts depends entirely on one’s circumstances. If one decides to go this route, Lamarque advises settling more expensive debt first, credit card and store card debt being the biggest culprits here. Once that has been settled, consider settling your lower interest debts, such as home loans.
Here are some other options:
- Contribute towards retirement by using a Retirement Annuity and getting the tax break i.e. SARS is in effect ‘contributing’ your tax rate towards your retirement.
- If you are young, contributing to a tax free savings account (TFSA) is not a bad option, as you can save R30 000 a year and reach the maximum allowed amount of R500 000 in your 17th year. The beauty of the product is that you pay no tax, especially Capital Gains Tax, which later in life will start becoming substantial. You can now gain access to quite a number of unit trusts in these TFSA vehicles, which is a great way to achieve good long term returns. The name of the product (Tax Free Savings Account) has become misleading, as most people think you can only get access to savings accounts with low interest rates, as opposed to unit trusts with exposure to equities, which give much higher long-term yields.
- If you don’t have debt to settle, consider starting a savings account for emergencies. The rule of thumb is to try build up about three months’ salary for emergencies, but this obviously depends on individual circumstances e.g. financial position and access to cash. BDO Wealth Advisers provide call accounts at very competitive fixed deposit interest rates. It is thus important to consider moving your money out of your cheque account because it basically earns no interest. If you have a home loan put the money into your access bond. A good trick, if you have monetary discipline, is to put the money you are going to spend on Christmas gifts and/or your holiday in your access bond and use your credit card to pay for these expenses. The next month when your credit card amount is due, use that money from the access bond to settle the credit card account. This way you save a month’s interest on your home loan account.
- If you have no debt, rather invest the money in a call account (short-term) or investments such as unit trusts (longer-term).
- Another suggestion from Lamarque is to consider donating some of the money to a charity, “donating is a good thing, if you can afford it. As the saying goes, charity begins at home; so don’t donate huge sums of money, if it means your family suffers financially. However, if you are in a position to donate, it is always a good thing to do as you can make a difference in someone’s life.”
What not to do with your bonus:
- Avoid spending it before you get it. One important factor is that many people don’t realise that year-end bonuses are eligible to be taxed. It is imperative to know how much of your bonus will actually be left after tax before spending it.
If you are in doubt, speak to a Certified Financial Planner for guidance on how to make the best financial decision for your financial wellbeing.