How to spend your Christmas bonus
For many employees, the end of the working year often means receiving a bonus – and knowing how to spend it can make the difference between a stress-free conclusion to the year and falling into a deeper financial crisis.
Once a certainty for many employees, year-end bonuses, including the traditional 13th cheque, are no longer guaranteed, Paul Hutchinson, sales manager at Ninety One, explained.
The evolving work landscape, coupled with global financial challenges, has eroded the prevalence of these bonuses.
For many, financial challenges are compounded by the habit of relying on bonuses to offset excessive spending throughout the year, which often leads to mounting debt.
“Salary increases have also tended to match inflation, at best, with the result that higher marginal tax rates and bracket creep have reduced our real purchasing power. This has exacerbated the financial predicament that many find themselves in,” Hutchinson said.
Mismanaging a bonus can lead to financial strain. For instance, accessing the savings component of a retirement fund should be a last resort.
The introduction of the two-pot retirement system offers a lifeline in financial emergencies, allowing access to retirement savings under specific conditions.
However, experts do not recommend withdrawing from your retirement savings since you will incur administration fees and income tax at your marginal rate, which will undermine your long-term retirement goals.
By prioritising the accumulation of an emergency fund, you can preserve your retirement savings and ensure they fulfil their intended purpose.
Alternatively, individuals overwhelmed by debt should consider seeking assistance from a National Credit Regulator-accredited debt counsellor.
For those lucky enough to receive a bonus this year, Hutchinson recommended seven areas where employees should spend their additional income.
Spoil yourself
After a year of hard work, it’s natural to want to reward yourself and your family. However, avoid overspending.
A general rule of thumb is to limit indulgences to 10% of your after-tax bonus. If you are heavily in debt, consider using the entire amount to reduce your financial burden.
Pay off short-term debt
Prioritise clearing high-interest debts such as credit card balances, personal loans, and store credit. These debts are expensive and can quickly spiral out of control.
A debt-free start to 2025 can significantly improve your financial well-being.
Build an emergency fund
Aim to accumulate at least six months’ worth of income in a money market fund. This fund should be reserved strictly for emergencies, such as retrenchment or unexpected medical bills.
An emergency fund prevents the need to dip into retirement savings, take out costly credit, or liquidate long-term investments.
Invest in a Retirement Annuity
Consider investing up to 27.5% of your taxable income (capped at R350,000 annually) in a low-cost, new-generation Retirement Annuity. Linked investment service providers offer tailored options to suit various needs.
Making this investment by February 2025 allows you to claim a tax refund, which you can then use to pay off long-term debts or reinvest.
Utilise a tax-free savings account
Tax-free savings accounts provide a tax-efficient way to save for specific goals or supplement retirement savings.
You can invest up to R36,000 annually and up to R500,000 over your lifetime without incurring income or capital gains tax.
Reduce long-term debt
Allocate the bulk of any remaining funds towards paying off long-term debt, such as a home loan.
This can alleviate financial pressure, especially given recent interest rate hikes. If your home loan has an access facility, additional contributions can also serve as part of your emergency fund.
Start investing in Unit Trusts
If you have addressed your debts and savings goals, consider investing in unit trusts. These funds provide access to professionally managed investments, allowing you to benefit from diversification and expert financial management.
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