Alan Atkinson

Retail Business Analyst

January 2017

How to spend your bonus effectively

With the summer holidays fast becoming a distant memory, it’s back to the grindstone in 2017 for South Africans across the country.
If you were fortunate enough to receive a bonus despite the challenging economic conditions, you now have a great opportunity to strengthen your financial position. Here are some tips to help you use your bonus effectively.

Don’t succumb to temptation
The temptation to splash out on that mountain bike you so desperately want (but don’t really need) becomes very real once the money lands in your bank account. While big-ticket purchases certainly bring short-term satisfaction, it’s important to weigh up the opportunity cost of not using that hard-earned money more effectively.
So if you do resist the urge to take to those bike trails on new wheels, now what?

Pay down debt
One of the very first options you should consider 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. While your company has shown that they value your contributions, it would be prudent to view any future bonuses 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. You may want to consider using your bonus to top up your retirement savings before the end of the 2017 tax year in February. 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 bearing in mind. 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.

Reward yourself
Finally, it’s important to treat yourself and your family. But before you start swiping your credit card, 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.
The beginning of the year is 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 info@prudential.co.za

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