This weekend, you should have received your December bonus, if you were lucky enough to get one. If you haven’t already spent it rashly in a holiday fever, make sure that you make the most of your windfall so that your money works for you.
Most people head into the festive season hoping to have a little more cash. And while it may be fun to spend more than usual, it can have unintended consequences that can last for years. Two things happen to most families heading toward the festive season. First, you are targeted with a barrage of advertising and special offers, encouraging you to spend more than you usually would.
“Secondly, you may become aware that the New Year will hold new expenses like school fees and uniforms. You are pulled between the urge to splurge and sensible, long-term planning,” says John Manyike, head of financial education at Old Mutual.
Many families have grown accustomed to spending a fortune on gifts each year. But if that tradition results in your family being in debt, it’s time to reconsider the habit. While nobody likes to be unpopular, tempering that habit can do wonders for your family’s financial health, adds Manyike.
Clear your debt
“If you do get a bonus, now is the time to do great things with it. Debt is the main obstacle to your financial security. It’s so easy to be caught up in the spiral of debt. One of the ways of avoiding that spiral is to clear at least part of that debt with your annual bonus.”
Anele Mbuya, senior marketing actuary at Old Mutual’s retail mass division agrees and explains that this is because the interest rate payable on debt is usually higher than the interest earned on savings. “In the short term, the difference between interest paid on debt and interest earned on savings can be significant,” she says. For example, store cards typically carry the highest interest rates. You only score if you pay off your purchases within a six month period, but if you take longer to pay off your purchases, the interest rate you are charged is even higher than the interest you pay on an outstanding credit card debt.
The next debt you should clear is your credit card. Ideally, the best way to use a credit card is by paying the entire balance off at the end of the month. That way, you can ensure you score on the 55-day interest-free benefit that comes with a credit card.
Boost your retirement savings
If you are the enviable position of being debt-free, you can use your bonus to boost your retirement savings. A retirement annuity has tax benefits. To explain: 15% of your taxable income from non-retirement-funding income excluding any severance benefits, or R3 500 less your current contributions to a pension fund, or R1 750, whichever is the greater, may be claimed by you as a tax deduction. By topping up an RA you can increase your tax benefits. Also, topping up your RA will increase the amount of savings that will be available on retirement. However, Mbuya points out that there are challenges in that your RA product may not allow for once-off lump sum deposits. If you do not already have a retirement annuity, now might be the best time to kickstart one with funds from your bonus.
It makes good financial sense to use your bonus to pay annual costs so that you can trim your monthly expenses in the year ahead. For example, you could pay your child’s school fees upfront for the year. This is an investment in your child’s education and you may find that if you do pay fees upfront, you will qualify for a discount.
“Annual car services are usually costly – and if the servicing costs exceed your monthly disposable income it is better to use your bonus to pay for your car service rather than incurring debt or drawing money from your savings,” Mbuya says.
You could also arrange to pay your insurance premiums for the year upfront. Besides shaving an expense off your monthly costs, you may find that your insurer will give you a better rate for a lump sum payment as opposed to monthly premiums.
Before you spend any money this December, sit down and draw up a holiday budget. Stick to the basics and resist the urge to spend lavishly on gifts. The best gift you can give your family is that of financial freedom in 2014 and the pleasure of starting the year on a sound financial footing.
When you draw up a holiday budget, bear in mind that the salary and/or bonus you receive in December is the last payment you will receive from your employer until the end of January. That is at least SIX weeks away!! Once the Christmas and New Year’s excitement has blown over, you still have to pay your monthly expenses as per usual.
Your bonus checklist
Manyike suggests taking time to list your priorities. It may be the most rewarding hour of your holiday:
- Tally your debt and make a conscious decision to pay off the most expensive debt first – high interest-bearing credit cards and store cards.
- Avoid getting into debt (or further into debt) by paying for your purchases with a debit card or cash, rather than a credit card.
- Set aside a portion of your bonus for investment over the long-term such as a tax-deductible retirement annuity or an endowment fund.
- Contribute part of your bonus to reducing your home loan or car finance. It’s a strategy that not only reduces the interest you pay on that loan over the years, but one that could ensure that the loan is paid up ahead of schedule.
- List your unavoidable commitments in 2014: school fees, medical bills, inflation-adjusted insurance premiums – and aim to set aside enough to handle those expenses without financial pain.
- Treat yourself and your family without going overboard. The festive season doesn’t have to cost you a fortune.
What you actually get
When you get a bonus amount, bear in mind that it is going to be subject to tax. For example, if you earn R15 000 a month and you are going to receive a 13th cheque, don’t make the mistake of thinking that you are getting a full R15 000 bonus.
Your tax breakdown will be as follows:
- A person earning between R160 001 to R250 000 per annum is subject to a tax amount of R28 800 + 25% of the amount over R160 000 (i.e R20 000) and receives a primary tax rebate or R11 440.
- Your bonus is taxed using the marginal tax rate which is 25%.
- Annual tax on basic salary: R28 800 + (0.25*R20 000) – R11 440 =R22 360
- Tax on bonus: R15 000 * 0.25 = R3 750
So your disposable bonus will be R11 250.
This article was first published in City Press in December 2013.