A bonus is like Christmas comes early or a second birthday. Most people spend their bonus before they receive the payment notification from their bank. You’re dreaming of that new car or expensive holiday already, aren’t you?
For some people, an annual bonus means financial relief or getting by a bit easier for a month or two. If you are in the fortunate position of working for an employer that believes in a 13th cheque, you are most likely to receive your bonus around the end of the year. Bonuses might also be paid out during the month of your birthday, what a nice company you work for, or your hard work might be rewarded with a performance bonus. Neither of these bonuses should be used towards your Christmas gifts, December holiday (this should be included in your annual budget) or any other big ticket purchases for that matter. The urge to splurge will definitely be there but should be avoided at all costs. You should be ‘spending’ your bonus before you earn it, but not quite on what you’ve daydreamed about. Planning ahead on how to spend your bonus is essential and here follows a list of how you should be using your bonus.
Clearing bad debt should be your first priority. Your bonus can be used to pay up any short-term loans, your credit card or retail accounts. Making full payment on these accounts can see you saving a lot on the harsh interest these products are usually taxed with. Use your bonus to seal the holes in your sinking budget and start to float again. Most retailers will charge a higher interest rate if your account with them is not paid within six months of the purchasing date. Once you paid up these accounts, close them completely and say sayonara! Credit cards also carry a high interest rate and should be paid up as soon as possible. Credit cards, in extreme cases, should be used for emergencies only.
Home or car loan
If you don’t have any bad debt, you might want to consider allocating your bonus towards your home or car loan. According to Shaun Rademeyer, CEO of BetterLife Home Loans, you can reduce the repayment period of a home loan of R 800 000 at an interest rate of 9.25% by 3 years simply by paying an extra R500 per month into your bond account. You will also be saving R 178 000 in interest. If you opted for balloon payment when you bought your car, your bonus can be a great way to either reduce your balloon payment that will be due at the end of your car lease agreement. You can also pay your bonus towards the principal debt of this lease agreement. This can either reduce the lease agreement period or the monthly instalment amount, depending on how you choose to allocate the lump sum payment. Remember to notify the credit provider about this once-off, lump sum payment and find out whether any penalty fees will be charged before you allocate your bonus towards your car’s principal debt or balloon amount.
After clearing all your bad debt or if you are currently debt free, keep it that way. Use your bonus either to start an emergency savings fund or a general savings fund. Savings are essential to any household. The balance of your emergency savings fund should be equal to approximately two to three times your monthly salary. Not having such a fund will force you into expensive debt, like maxing out your credit card or taking out a loan, when unexpected expenses arise. If you already have an emergency fund in place and feel comfortable with the amount saved, you can invest your bonus in your children’s future education. Do proper research and find a savings product from a recognised financial institution that will best satisfy your needs. Whether you want to send your child to university or to a proper school, this investment will surely give you, and them, a head start.
It might seem that the list so far has been compiled by a very strict and grumpy person who doesn’t want you to have fun. Rest assured, you are allowed to spend your bonus – what you spend it on is a different story though. If you have no debt to your name, which seems highly unlikely with recent statistics showing the majority of South Africans are deep in debt, you can spend your bonus as long as you spend it wisely. If you are a property owner, home improvements or renovations is a great way to spend your bonus and invest in your property at the same time. Change your home from drab to fab with a new paint job or renovate your kitchen. Save costs by going DIY with the tasks you feel comfortable with. Investing in your property by renovations or improvements can increase the value of your property over the long run.
So don’t go blowing your budget on expensive items that will only provide you with temporary satisfaction. Tighten your belt and follow these four tips when that 13th payslip, who uses cheques these days, arrives in your mailbox. Every reader is in a different position and has unique needs – whether you will be clearing debt, using your bonus towards your home or car loan, starting an emergency or education fund or spending it on something like home renovations, the informed decision is yours to make – don’t fall victim to the urge to splurge.