It is that time of the year again where many households in South Africa will experience a financial boost with either a bonus or a little extra added to their salary. But given our current economic conditions more than ever before, you have to think carefully how you spend this additional money.
The problem is: employees who get a 13th cheque or annual bonus often pay for living costs such as their children's school fees, or expenses that they couldn't afford earlier, as their monthly income was just not enough to meet their needs. Other people might be lucky enough to use it for their holiday, or treat themselves with the purchase of something special.
We agree that it is sensible to use your 'bonus' as a buffer to ease your financial stress. However, we also think there are savvy ways to spend it. Here are five of them.
A retirement annuity (RA) aims to grow your pre-retirement investment so you have a pool of savings available when you retire. If you have an existing RA, your annual bonus would be a welcome lump sum boost to your retirement savings. If you are not already saving for retirement, this could be the perfect opportunity to start.
With inflation and the cost of living rapidly increasing, you could use your bonus to settle costs so that don't form part of your monthly budget. For example, your insurer is likely to offer you a discount if you choose to pay your premiums as an annual amount rather than a monthly debit order. Or you could set aside part of your bonus for your car's annual service and maintenance costs.
If you don't have an emergency fund, now is a good time to start one using part of your bonus. Ideally, according to the financial experts 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.
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. The ideal is for you to save or invest your entire bonus, but that is not realistic for many consumers. South Africa's savings rate remains low, which means most people rely on credit to pay for emergency expenses. You don't want to be that person!
Reduce the capital portion of your home loan
If you pay R10 000 off a R1 million home loan this December, you will cut a whole six months off your 20-year repayment period and, at the current home loan interest rate of 9.25 percent, save more than R52 000 worth of interest. Reducing your loan also helps create a 'cushion' against interest rate increases, and gives you room to manoeuvre if you need to borrow against your home in future.
There are several great things you can do with a bonus that will help you feel wealthier all year round, and the most important of these is to reduce your debt, especially any debt that carries a high interest rate. You will thank yourself later. Happy Holidays!