There’s no better feeling than looking at your bank balance after your bonus has been paid and seeing nearly double what’s normally there. Even the most disciplined person would be tempted to go to town and spend up a storm, especially since bonuses are usually paid out smack in the middle of the holiday season.
But of course, there’s a small, sensible voice in the back of your mind that knows what you should be doing with that bonus. We’re here to turn the volume up on that voice and help you make the right decisions now, so that you can start the year on a sound financial footing. Which is better than having a blow-out in December, right?
You may be surprised to see that the first item on the list of sensible things you should be doing is to give yourself or your family a treat. It’s important to enjoy life and it is far easier to stick to good habits if there are little rewards along the way. We’re not counselling you to blow the whole bonus, just set aside a small amount (10% to 20%) and spend it on things that will brighten your day.
To illustrate how much debt is costing you, if you owe R5 000 on a credit card at an interest rate of 16% (most banks charge interest on credit cards at a rate between 15% and 18%), you will pay back R872.65 a month at a total of R5 235.90 over six months. If you clear that debt upfront, you’ll save yourself R235.90 in total. Use FNB’s calculator to work it out for yourself.
One method of paying off debt is to pay back your most expensive debt first. This doesn’t mean you should pay back the debt with the biggest amount owing, it means you should first tackle the debt that you’re paying the highest interest on. If you don’t know how much interest you’re paying, find out from each of the institutions that have lent you money (this includes banks and retail stores).\
An alternative method of paying off debt is the snowball method. This involves tackling the smallest outstanding balance first. Why not use your bonus to clear all or part of that debt and put a plan in place to pay off any other debt you might have next year?
People tend to think of their bond repayments as rent: monthly payments that they must make to be able to live in their homes. In actual fact, you could get rid of your bond and the interest charges sooner than you think. If you pay extra into your bond you can substantially reduce its term and how much interest you pay over that term. For example, if you have a bond of R900 000, at an interest rate of 10.25%, you’ll be paying back R8 834.79 per month over 20 years, totalling R2 120 349.72 (R900 000 plus R1 220 349.72 in interest). If you pay in a lump sum of R20 000, you’ll reduce the term of your bond to 18.63 years, and will have paid a total of R1 975 636.72, saving yourself R124 763.28.
Everyone should have an emergency fund or a retrenchment fund. Speak to your bank about the best option for your requirements. There are various options for you to consider, from longer notice period accounts where you can earn more interest (for example a 32-day call account where you have to give the bank 32 days’ notice before you can withdraw your money) or a money market account, which will require a minimum deposit and that you maintain a minimum balance. You can work out how to make your money work for you with Capitec’s savings calculator (select the “to earn interest” option).
You can also invest up to R30 000 a year into a tax-free savings account, which means you won’t be taxed on the growth of this investment. You can find out more about tax-free savings accounts here.
Many schools and insurers offer a significant discount if you make an upfront payment of the year’s fees or premiums. That’s a great way to reduce your annual expenses and to free up much-needed cash in the year to come. However, be sure that you are disciplined and save the money that you would have spent each month so that you don’t end up losing out in the long term.
As tempting as it may be to spend your hard-earned bonus frivolously over the holidays, bear in mind that there are 12 long months ahead of you and you have the option to use that money wisely. Do your future self a favour and don’t blow your bonus in the silly season - a healthy bank balance and sound investments will be your long-term reward.