We’re heading quickly towards what, for many of us, is the most expensive time of year. Year-end festivities, office parties, Christmas and New Year celebrations are followed rapidly by a new school and/or university year, increased medical aid premiums and higher living costs. A year-end bonus can be a financial lifeline at this time of year. But before you spend it, consider the following do’s and don’ts:
What to do with your bonus
Pay off expensive debt
Your bonus can be effectively employed to reduce your debt, particularly high interest debt such as retail and credit cards. Mounting unsecured debt, with compounding interest working against you, can keep you awake at night. Make a list of your debts, interest rates and repayments, and use some of your bonus to settle your debt. Paying off even one small debt can give you a massive psychological win going into 2020.
Invest your money
If you haven’t yet started investing, use a portion of your bonus to set up an investment such as a unit trust portfolio. Even if you can only afford to invest the minimum lump sum contribution, taking the first step towards investing for the future can be life changing. With many unit trust platforms offering online investment capability, you can begin your investment journey from the comfort of your own home.
Boost your emergency fund
There is nothing quote like a broken oven or sick dog to make you appreciate an emergency fund. The two most important features of an emergency fund are (a) that the money is easily accessible and (b) that the money is kept in a separate account. The nature of emergencies is that you cannot foresee them and, as such, the money is generally needed on the same day. Make sure that you have immediate access to the money as and when you need it. To avoid the temptation of dipping into your emergency fund unnecessarily, move it into a separate savings or money market account earmarked specifically for life’s unexpected events.
Maximise your retirement annuity contributions
If you haven’t yet maximised your tax-deductible contributions towards your retirement annuity or retirement fund, bear in mind that you have until end-February 2020 to do this. Being able to effectively invest with pre-tax money is a significant benefit and it is worth channelling a portion of your bonus to boosting your retirement savings. If you earn an irregular income or are a commission-earner and are unsure how much of your bonus to invest in your RA, consider parking the money in your access bond until you are able to calculate your annual tax-deductible amount.
Prepare for school and university fees
If you have school or university-going children, you may want to set money aside for the inevitable costs of school fees, new uniforms, stationery, books, computers and sports equipment. Most schools start mid-January 2020 which means you will need access to cash in early January to ensure that your child is adequately kitted out in time for school. Many university and college deposits become due in February, providing a little extra breathing room. Give careful thought to what expenses will be payable and by when to ensure the ‘back to school/varsity’ stage is financially manageable.
Invest in yourself
If possible, use part of our bonus to invest in your own personal development. Enrol in a photographic course, learn how to be an online share trader, register for online studies, join a gym or running club, learn another language or sign up for a cooking class. Invest in your own growth and development while at the same time finding fulfillment in learning and discovering new things.
Take advantage of upfront discounts
Many service providers offer discounted fees if accounts are paid upfront annually. From experience, many schools, day care centres, gyms and clubs provide significant discounts if fees are paid in January for the entire year. While it might seem a big ask at the time, it will definitely help alleviate financial pressure later in 2020.
Put money into your home loan
Putting all, or part, of your bonus into your home loan will have the welcome effect of reducing the overall interest that you pay in the long term. Any extra money you inject into your home loan immediately reduces the capital balance and saves you interest. As an extra benefit, this can also protect you against future interest rate hikes.
What NOT to do with your bonus
When it comes to your bonus, you should NOT:
Spend it before you get it
One of the worst mistakes you can make is to spend your bonus before it actually lands in your bank account. Depending on the terms of your employment contract, receiving a bonus may not be guaranteed. Wait for written confirmation from your employer on the exact amount of your bonus before taking any action.
Forget that it is taxable
Your bonus is subject to tax at your normal tax rate, so be sure to know what the net value of your bonus is before spending it. Our advice is to exercise patience and wait until the money actually lands in your bank account.
Fall victim to mental accounting
Mental accounting is a behavioural bias where we compartmentalise money without seeing the whole financial picture. Do not think of your bonus as a financial ‘windfall’. Consider it part of your earnings and think carefully how you can best employ it to strengthen your financial position.
Delay making a decision
The longer you delay making a decision regarding your bonus, the more likely it will be gradually whittled away with precious little to show for it. Take a full view of your financial position and be intentional about what you want to achieve with the money. As soon as you receive your bonus, implement your plan of action without hesitation. Our will power is put the test over the silly season and the quicker you implement your strategy, the better.
Rack up more debt
Avoid using your bonus to rack up even more debt. While you might be tempted to use the money as a deposit on a material purchase, give careful considerations to the monthly instalments you will be committing to and the additional pressure you will be putting yourself under.
Forget about Janu-worry
If you are paid mid-December, which is something many employers do over the festive season, bear in mind that your next pay cheque may be 6 weeks away. Do not put your head in the sand and avoid thinking about January’s financial commitments. Prepare a realistic festive season budget and commit yourself to it.
Have a wonderful Wednesday!