The year 2017 has had its ups and downs and chances are that those lucky enough to receive a bonus have earned it!
While spending your bonus wisely will likely entail using part of the windfall to pay down debt or boosting those areas of your financial planning where there might still be holes (like retirement provision), the good news is that financial planners are in agreement: if your financial circumstances allow it, you should use at least a small portion of your bonus to reward yourself and buy something you’ve wanted for some time or take that (inexpensive) holiday.
Although it can be tough to maintain a level-headed approach during the silly season, advisors recommend that you also use your personal circumstances as a reference point to make an informed decision – speak to a financial planner where necessary.
Settle expensive debt
While individual circumstances will differ, debt settlement always has to be high on the priority list, says Peter Hewett, managing director of Hewett Wealth.
Where individuals have outstanding credit card or clothing account debt, he would generally recommend they close as many of these accounts as possible after the debt is settled.
Michelle le Roux, wealth analyst at Foundation Family Wealth, says short-term debt like credit cards or personal loans are usually very expensive, and it may be wise to use at least part of your bonus to reduce the term of the loan and save on interest or to settle it completely where possible.
Most people are over-indebted and invest too conservatively. As a result, a general rule of thumb would suggest that people rather use the money to pay down debt, since the interest rate would typically be higher, Andró Griessel, managing director at ProVérte Wealth & Risk Management, adds.
But think carefully about using your bonus to settle credit card debt if you will only max out your credit card again within three months, Griessel cautions. Paying credit card debt with a bonus may only be putting a bandage on a bigger problem – having credit card debt that isn’t settled on a monthly basis.
If this is the case, it may be useful to rather pay down car or mortgage debt permanently.
Martin de Kock, director at Ascor Independent Wealth Managers, says at an interest rate of 10% over 20 years, a R1 million bond will require a monthly payment of R9 650 and you will have to pay total interest of more than R1.3 million over the period.
By paying R20 000 of your bonus into your bond at the start, you will save more than R117 000 in interest and settle the bond 14 months early, if you keep the monthly repayments the same, he adds.
Make a contribution to an RA
For taxpayers in higher marginal brackets who haven’t utilised their maximum tax-deductible contributions to a retirement annuity, and for whom it makes sense after their overall tax position was considered, an additional contribution to a retirement annuity is generally a sensible choice, due to the tax-saving and significant compounding benefit within the vehicle, Hewett says.
Individuals can deduct their contributions to a retirement annuity with the maximum tax deduction capped at the greater of 27.5% of taxable income or remuneration, subject to an annual maximum of R350 000. After settling debt and maximising your benefit from a retirement annuity, consider utilising the maximum annual contribution to a tax-free savings account of R33 000, he adds.
“Put aside some of your bonus for unexpected or unplanned expenses.”
You could also think about paying school fees in advance, saving for your children’s education, starting an emergency fund or upskilling yourself. “Many schools have an enticing discount if the fees for the year are paid in full upfront,” De Kock says. “In addition, this relieves your monthly expense budget.”
Unfortunately, most people are only one skipped payment away from significant financial trouble and don’t have the means to start an emergency fund. An annual bonus is ideal for this purpose, he adds.
Also invest in yourself. “If you are a handyman, investing in tools or equipment could save you having to pay someone else to do basic improvements in and around your house.”
Using a part of your bonus to enrol for a course could increase your earning potential in the long term, or even just increase your life enjoyment, De Kock says.
You could also consider contributing to a charity.
“Enough research has been done to prove that giving increases your level of happiness,” he says.
Hewett says for very large bonus earners an important strategy is to revisit their local and offshore asset and geographical allocation, particularly in light of the growth limitations South Africa is currently experiencing.
While a monthly salary usually allows people to get from point A to B, a dividend or bonus is supposed to improve your life. Depending on personal circumstances, that is what it should be used for, Griessel says. If debt suffocates you, reduce your debt, but if it doesn’t, use it to do something that makes you happy. Go on holiday, help a family, whatever strikes your fancy.
Although money can’t buy happiness, it can help to enhance it, he says.
“One needs to use it in a sensibly way. If money causes stress in your life, use your bonus to reduce the stress, but ask yourself if it is a permanent or temporary measure.”
But also remember January, says De Kock. The first month of the year often has challenges that haven’t been budgeted for like new school clothes, deposits for school fees and the fact that December’s salary may have been paid early.
“Put aside some of your bonus for these unexpected or unplanned expenses.”
This way, both you and the Christmas Grinch are kept happy.