It's easy to be tempted into spoiling yourself after a hard, long year.
Why work if you can't spend your hard-earned money, right? But is it the best thing to have a short-term splurge when a few wise choices could help your bonus work harder in the long run? We asked a few experts for advice. We're just human and tend to want to reward ourselves immediately, says Anil Jugmohan, an investment analyst with Nedgroup Investments. How many of us would be prepared to skip our bonus this year to get a bigger one next year?
'It’s only human to say, ‘I’ve earned this’, then spend like mad'
But people could make the mistake of putting their bonus towards buying something they can’t really afford. “The novelty and excitement of having a new car will soon wear off but you’ll have to keep up your monthly payments for five years.”
Yes, you can spend your bonus or part of it to reward yourself, Anilsays, “but you can do so cleverly. Regard it as a windfall that you can use with an eye to the future.”
Nico Swart, a lecturer in personal financial management at Unisa and author of books on financial skills, says, “Ask yourself where the bonus could best serve your and your family’s goals and spend it on that.
10 things you can do with your bonus
1. Pay off your most expensive debt: If you have a lot of unsecured debt carrying high interest you must consider spending a large portion of your bonus on this, says Dave Mohr, chief investment strategist of Old Mutual Wealth. “Ïn the past while many people have fallen into too much of this type of debt.” It varies from credit cards to clothing accounts. “You should preferably not buy clothing on credit.
“Give preference to arrears debt [including services accounts], then shop accounts, credit cards and motor car debt,” Anil suggests.
2. Increase your ownership of your house: House bond debt can wait until last because it’s so much more affordable than unsecured debt, says Nico. But if unsecured debt is under control you can save yourself a lot of interest in the long term by putting bonuses into your bond.
“In this way you increase your share in your house’s value and reduce the bank’s, thereby strengthening your financial position,” says Dave. Owning your house completely should always be one of your most important aims. “Especially in these uncertain times it’s good to keep your bond as small as possible. Then if things go wrong at work or in your own business, at least you won’t have big debt on your house.”'
It makes more sense to put your bonus into your bond rather than into a fixed deposit, which apart from a relatively low interest rate offers no tax benefits.
“The faster you pay off your home bond the less interest your pay ultimately.” You can save more than R220 000 in interest and pay off your bond five years earlier if you make a one-off payment of R10 000 extra every year on a bond of R700 000 with a loan period of 20 years*.
Anil says it’s important to reduce your bond balance as fast as possible, especially while interest rates are low. Bond facilities such as Access Bond allow you to withdraw extra money you may have paid in if necessary. This is a much cheaper source of money for unforeseen expenses than personal loans or credit cards.
3. Family planning: Nico says young couples should invest bonuses for baby expenses if they’re planning to have one. “Always think in the long term,” he says.
4. Pay school fees in advance: It makes sense to pay your child’s annual school fees, or at least a large portion of them, in advance – especially because some schools give a discount of 5% or more.
5. Invest in your child’s future: It’s a good idea to save your bonuses for your children’s education, Anil says. “This gives them an advantage when they start working. [Better qualifications can help them get better jobs and they won’t have to pay back study loans.”'
It’s an investment in peace of mind, bearing in mind that many South Africans can’t make adequate provision for their retirement because they’re still supporting adult children.
6. Start an emergency fund: You never know what unexpected expenses – for repairs to your car or house, for example – will crop up next year, says Anil. You should also have a monetary buffer in case you suddenly lose your job.
7. Make extra provision for retirement: “If you have a retirement annuity or savings plan you can put your bonus into it,” says Anil.
“For long-term financial planning it would probably be best to invest in a balanced product that gives you exposure to a combination of local and international government securities, cash and property,” says Dave. Also choose a proven asset manager who “actively manages” investments. "I would be careful about investing everything in shares because the market has already risen a lot.”'
8. Increase your medical cover: Consider using your bonus for extra medical cover, says Anil. You can also pay hospital plan premiums a year in advance.
9. Increase the value of your house: Small improvements can give you pleasure and increase your property’s value – for example new safety gates or a more attractive garage door. Or brighten the bathroom or kitchen with new tiles, taps and a coat of paint. Or reward yourself with the inside braai you’ve wanted for so long, Nico suggests.
If you’re renting your house you might like to invest in lower future maintenance and petrol expenses and your family’s safety by buying a new set of tyres for your car.
10. Invest in yourself: Turn an unexploited talent into extra income. If you’re good at home improvements, buy a few new tools, advertise your services and see what happens. If you’re artistic invest your bonus in camera equipment for wedding photography or in computer equipment to be used for web design.
* According to Absa online home loan calculators.