How To ... Spend your bonus wisely

2012-12-11 13:52

A bonus by its nature is an ‘unexpected extra’ that you get with your year-end pay cheque, so don’t use it to increase your expenses, writes Liziwe Ndalana

This month, some households will experience a financial boost with either a bonus or a tax rebate.

Many South Africans have become used to having bonuses and tax refunds as an expected additional income instead of an “unexpected extra”, and subsequently include it in their expenses.

This year, however, one cannot afford to blow the windfall on a shopping spree as the economic conditions make it imperative to pay debts and boost savings.

With the outlook for both the local and global economy looking bleak, it is important to use your bonus as a buffer to ease your financial stress. Experts warn that if the eurozone crisis is not resolved, the fallout will engulf the rest of the world, with developing nations like South Africa likely to be hard hit.

If the global economy dips into another recession, jobs will be lost, working hours cut and salary increases reduced drastically as companies’ profit margins get increasingly thin.

This also means that the unemployed may find it even more difficult to find employment sometime soon.

Already, many South Africans are experiencing financial strain due to adverse international and domestic economic conditions.

According to the most recent Credit Bureau Monitor, the number of consumers with impaired records increased by 170 000 to 9.22 million in the second quarter of this year.

The report states that there were 19.60 million credit-active consumers as of June 30, an increase of 0.6% from the previous quarter.

Much of this can be attributed to spending money we haven’t yet earned on goods that we do not need. South Africa’s savings rate remains low, so people rely on credit to pay for emergency expenses.

Prem Govender, the chairperson of the South African Savings Institute, warns consumers that they should plan their spending and not incur unnecessary debt to buy luxuries they cannot afford during this festive season.

He said: “While it is justifiable to be merry, we want to remind consumers that the short-lived joy over the season might not be worth the suffering they are likely to go through if they do not plan for obligations awaiting in the New Year, especially at the beginning.

“Bonuses should be put to more productive use such as paying off debt or even starting a retirement savings plan.”

Jason Garner, a management consultant at Acsis, says South Africans who are lucky enough to receive tax refunds should look to immediately reinvest the money or use it as an opportunity to settle some debt before the festive season spending spree starts.

Consumers should not view a tax refund as a gift, but rather as a wealth-creation opportunity.

Garner said: “Receiving a lump sum of cash is a great time to consider investing, as even the smallest of tax refunds can be put to good use if the correct investment is chosen.”

He added that saving might not be as fun as shopping, but consumers should consider the fact that investing a tax refund of R5 000 on a yearly basis and earning 12% on it yearly could amount to R360 000 in 20 years.

“This could mean retiring a few years earlier or treating yourself to a trip abroad, instead of wasting it on something small

and insignificant,” he said.

If you contribute to a retirement annuity, it is important to remember that your tax rebate may well be a result of the tax benefit of your retirement contribution.

If you spend this rebate, you are effectively losing the opportunity to boost your retirement savings with before-tax money.

Things you could do with the windfall

» Put aside money for January’s additional expenses.

» Write down all your debt and pay off the lowest-value debt with your bonus and close the account.

» Budget for any major expenses, such as a major car service or replacing a faulty fridge.

» Pay your child’s yearly school fees in advance and receive the discount.

» Pay a hospital plan or insurance policy upfront for a year.

» Take advantage of your tax-free retirement savings and put 15% of your bonus into a retirement fund.

» Pay all outstanding service bills, such as electricity and water.

» Kick-start your children’s education plan.

» Additional reporting by Maya Fisher-French

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