Before your year-end bonus lands in your bank account, give some careful thought as to how you intend to use it. Your short-term decisions can have lasting effects on your 2017 financial health, and our advice is to be prudent about allocating your bonus or thirteenth cheque. Regardless of the size of your bonus, here are some smart ways to make your extra money work for you:
- Spoil yourself
Having some form of personal reward for one’s hard work helps one to stay positive and focused. Whether you choose to spoil yourself with a material purchase or an experience, set aside some money for yourself as a personal reward for hard work performed throughout the year. Be kind to yourself.
- Maximise your retirement annuity contribution
Legislation has 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. We encourage all investors to maximise their RA contributions before the end of the tax year in February 2017. If you haven’t maximised your RA contributions to day, it would be wise to set aside some of your bonus to boost your retirement savings.
- Settle unsecured debt
Besides for high interest rates, having unsecured debt has the potential to keep you awake at night. While certain debt is inevitable – and often necessary – it is highly advisable to channel some of your bonus towards settling debt such as credit card debt, retail accounts and personal loans.
- Create an emergency fund
There is nothing quite like a broken stove or sick pet to make one appreciate an emergency fund. Although there is nothing exciting about ‘putting money away for a rainy day’, it is a decision that your future self will undoubtedly thank you for.
- Pay for annual upfront expenses
Service providers offer discounted fees if accounts are paid annually upfront. From experience, many schools, clubs and gyms provide significant discounts if fees are paid in January for the entire year. Although one might balk at the idea of paying a huge upfront instalment, especially in a month of higher expenses than normal, your monthly financial commitments for next year will be significantly reduced, making next year’s financial demands a little easier.
- Contemplate the year ahead
In the headiness and excitement of the festive season, it is easy to forget future financial commitments such as school tours, new vehicle tyres and high-cost items such as orthodontic work. Before committing too much of your bonus to festive season frivolities, make a list of next year’s expenses and give careful consideration as to how they will be funded.
- Invest in yourself
Warren Buffett wisely once said that, “The best investment you will ever make is in yourself”. If possible, use part of your bonus on your own personal development. Pay for a photographic course, register for online study, join a gym or running club, or register to learn another language. Personal fulfilment is essential to happiness, and any money channelled in this direction is well spent.
- Put money into your bond or car
Putting part (or all) 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 rate hikes.
- Tax-free savings account (TFSA)
A TFSA allows you to invest up to R30 000 per year into a tax-free savings account up to a maximum life-time amount of R500 000. Investors do not pay tax on any interest or dividends earned by the investment and no CGT is paid on withdrawal.
- Give to charity
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. As Winston Churchill said, “We make a living by what we get, but we make a life by what we give.”
Allocating your year-end bonus appropriately 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 the pivot on which financial decision-making turns. Our advice is to look to 2017 and prepare, rather than look back at 2016 and regret.
Have a super weekend!