Make your bonus work for you this year

2014-11-11 08:00

Start creating wealth by saving a portion of your 13th cheque or bonus each year. Neesa Moodley shows you how

If you saved R10?000 of your bonus each year, you would have R67?000 saved within five years. Even R10?000 paid once-off into a mortgage of R1?million would reduce the term of the loan by up to five months and save R52?000 in instalments.

So are you just going to blow your bonus this year or make it really work for you?

Boitumelo Mothoagae, a financial adviser and head of customer retention at Liberty, says: “If you are lucky enough to earn a bonus each year, the onus is on you to ensure you spend or save it wisely so your money works for you rather than the other way around.”

Mothoagae shares the following on how you can minimise your spending over the festive season and ensure you spend your bonus in a financially savvy manner:

Budget, budget, budget

Of course, you want to spend some of your bonus on your holiday and spoil yourself. After a long year of hard work, it does seem fitting, but you would be wise to set yourself a holiday budget before you even receive your bonus. Allocate a reasonable sum of money towards rewarding yourself or your family and then make sure you stick to the budget.

Likewise, set a gift budget or go for a different approach and suggest everyone sticks to handmade gifts this year. This can reduce your costs, create personal memories and could be an opportunity for some fun moments.

Bear in mind that the period between the receipt of your

December salary and/or bonus and your next salary is very long for most people.

Plan for your holiday

December is quite similar to taxes in that it rolls around with alarming speed each year. Take the time to plan for your holiday by setting aside a small amount of money each month. Discuss the holiday plans well in advance so you pre-empt any last-minute issues.

Keep credit to a minimum

If you have huge amounts of debt, you should seriously consider using your bonus to pay it off so you can start January on a clean slate. Pay off your debt, starting with the highest interest-bearing debt. Typically, your credit and store cards attract the highest rates.

“Remember, any money you spend on credit over the ­festive season will have to be repaid once the Christmas lights go off,” warns Mothoagae.

She also points out that if you delay paying off your debt, the amount you owe is going to attract interest charges, so you could end up paying, for example, R130 for a R100 loan.

Be careful of payday loans

Many people run out of money in January because their December salary comes early. With a month to go before the next cheque, many people resort to “payday” loans. These can be expensive. For example, if you borrowed R1?000 for 30 days, you would have to pay R1?356 back at the end of January.

Share costs

Chances are strong you will be spending the festive season with friends and family. Regardless of whose home you are staying at, arrange it so that everyone contributes towards the holiday. This reduces the cost for the hosts and neatly sidesteps the problem of a wallet that is too light before the year is over.

Save for a rainy day

“You could use your bonus to save towards your retirement annuity, or you could pay it as a lump sum into another investment. You could pay your bonus into your bond and this will have the welcome effect of reducing the interest you pay in the long run,” says Mothoagae.

If you don’t already have an emergency savings fund, you should start one right away. This is basically a savings fund that you use to pay for emergencies such as the excess payment due on your insurance policy when you need to make a claim.

Ideally, you should have the equivalent of three to six months of your net salary in your emergency fund. If your bonus is not sufficient to cover this amount, use it as a good opportunity to start an emergency fund.

A retirement annuity is one of the best options for “parking” your bonus money because of the tax benefits. In a nutshell, you can claim whichever is the greater of the following as a tax deduction when you contribute to a retirement annuity:

.?15% of your taxable income from nonretirement funding income excluding any severance benefits

.?R3?500 less your contributions to a retirement annuity

Note that not all retirement annuities offer you the option of a once-off top-up benefit. If this is the case, you could use your bonus to kick-start a new retirement annuity.

Annual costs

You can save yourself some financial heartache during the year ahead by using part of your bonus towards certain annual costs.

You may find you receive a discount, for example, if you opt to pay an annual insurance premium instead of a monthly premium.

Or you could set the money aside for annual costs such as your car’s service and maintenance costs.

If you are lucky enough to belong to a dual-income household, you could consider using some or all of your bonus for school fees for the next year.

Most schools offer a discount of between 5% to 7.5% for an upfront payment at the beginning of the year.

One of the “bonus” effects of using your bonus for annual costs is that you automatically free up room in your monthly budget for the year ahead.

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