Tax & Advisory » Industry News » Annual bonuses can buy peace of mind

Annual bonuses can buy peace of mind

The best way of spending your annual bonus is to buy financial peace of mind for the festive season and for 2012.

Given the current economic environment, consumers should seriously consider repaying their debt and saving what is left instead of lavishly spending their bonuses on luxury items they can do without.

Peter Dempsey, Deputy Chief Executive of the Association for Savings and Investment South Africa (ASISA), says your annual bonus can either buy you instant gratification likely to be short-lived, or it can help boost your long-term financial wellbeing. Often consumers think of their bonus payments as an annual windfall that must be spent at a shopping mall.

“While there is nothing wrong with using some of your bonus money to spoil yourself as a reward for 12 months of hard work, whittling down debt must take priority,” advises Dempsey.

“The reality is that most consumers are servicing some form of debt like a mortgage bond, vehicle financing, clothing and furniture accounts or a combination. While clearing debt should always take priority, short-term debt like credit card debt and clothing accounts should be at the top of your list when allocating spare money.”

Short-term debt is expensive and should be avoided, because interest rates charged on such debt are high. Long-term debt such as a mortgage bond is funding what is hopefully an appreciating asset such as a home.

Once you have cleared your short-term debt, you should focus on repaying your long-term debt as quickly as possible. If you do, you will save yourself a lot of money over the long-term.

Here are some tips on how to sensibly spend your annual bonus:

  • If you have outstanding credit card debt as well as clothing accounts, your bonus may not cover all the debt. First repay the debt that is attracting the highest interest rate.
  • If you only have a mortgage bond to repay, transfer a significant portion of your bonus money to your bond. You will save on interest payments on your mortgage bond in the long run.
  • If you are lucky enough to be debt free, make sure that you have an emergency fund that consists of at least three times your monthly salary after tax. Use this fund to provide for unplanned expenses like new tyres, replacing broken household appliances, costly medical events or retrenchment.
  • If you have no debt and an emergency fund in place, consult a trusted financial adviser and invest your money. Your financial goals could include saving for a deposit for a home, your children’s education and a secure retirement.
  • There is nothing wrong with using a portion of your annual bonus to spoil yourself and your family. However, the more indebted you are, the less you should be spending on treats.

If these tips sound boring and you were hoping to use your bonus for something fun like a new sound system or a revamped wardrobe, consider that half of all credit-active South Africans are in arrears with their repayments. Also, for every Rand earned in South Africa, almost 77 cents go towards repaying debt.

If that is not enough to convince you to use your bonus wisely, remember that more than one million South Africans have lost their jobs since the financial markets crisis struck in 2008.

(Source: Peter Dempsey Consumer Education Media Release, Association for Savings and Investment South Africa.)

To set up interviews, contact Suzette van Niekerk (BCom LLB, CFP, FSP 4635) of Exceed Private Client Services (Pty) Ltd, tel. 021 852 0382 and e-mail suzette@exceed.co.za.