How to make the most of your bonus
Bonus season is around the corner and soon you may find yourself drawn into a familiar tug-of-war between the head and heart. Adequately planning for an impending bump in your bank balance is key to not falling victim to your emotions. Here are some tips to help you use your bonus as effectively as possible.
Don’t succumb to temptation
With holiday cheer beginning to fill the air and thoughts of lounging by the pool occupying your mind, it’s easy to let your financial goals and obligations slip out of focus. The temptation to splash out on that mountain bike you so desperately want (but don’t really need) becomes very real. While big ticket purchases certainly bring short-term satisfaction, one needs to weigh up the opportunity cost of not using that hard-earned money more effectively.
So you managed to muster every last ounce of will power you possess and passed up on the bike; now what?
Pay down debt
One option is to use your windfall to reduce any short-term debt obligations that carry high interest rates, such as personal loans or store cards. However, it’s important not to make a habit of relying on your annual bonus to settle debt. During these trying economic times, it would be prudent to view the receipt of a bonus as a possibility, rather than a certainty.
Set up an emergency fund
It is also sensible to allocate a portion of your bonus to a “rainy day” fund (if you don’t already have one) that can be used as a safety net to cover any unexpected one-off expenses, such as medical emergencies or critical home repairs. An emergency fund can also help to cover your family’s living expenses in the event that you lose your job.
Invest for your future
According to National Treasury, only 6% of South Africans can afford to maintain their standard of living in retirement. Receiving a bonus provides a great opportunity to top up your retirement savings before the end of the 2017 tax year. The government provides incentives to save towards retirement by allowing individuals to deduct contributions from their taxable income (within certain limits). For more information on the tax benefits of contributing to retirement savings products, see this article.
Opening a tax-free investment account is another option worth considering. Investors can contribute up to R30,000 to their tax-free account each year*, with a maximum allowable lifetime contribution of R500,000. Investment returns earned in the account (i.e. income and capital growth) are completely free from tax, as are any future withdrawals.
It’s been a long year and you’ve worked hard; it’s important to treat yourself and your family. But before the money lands in your bank account, decide on the percentage that you will be allocating to “luxury expenditure” and stick to it. Anywhere between 10-15% is a good rule of thumb.
As the year draws to a close, it’s a good time to review your financial plan to assess whether you are still on track to meet the objectives you’ve mapped out with your financial adviser. This will serve to bring your investment goals back into focus and help ensure that your spending decisions are made with an objective lens.
Prudential unit trusts and tax-free investments can play an important role in your success: if you aren’t already investing with Prudential, contact your Financial Adviser or our Client Services team on 0860 105 775 or at email@example.com.
*Be careful not to exceed R30,000 per year - SARS will levy a 40% tax on any contributions above this amount.