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If you were fortunate enough to receive a bonus in 2019, you may be wondering how best to use your new-found cash injection. But with so many options (and distractions) vying for your attention, it can be difficult to know exactly what to do. So to help you out, we’ve put together a list of five pointers to help you navigate your way to spending your bonus in a smart and effective way.
1. Don’t give in to temptation
The temptation to splurge on that fancy new mountain bike or latest cell phone you so desperately want (but don’t really need) becomes very real once you actually have the money to make the purchase. While big-ticket items certainly bring short-term satisfaction, it’s important to weigh up the opportunity cost of not using that money more effectively. Assuming sanity prevails (and you manage to resist the urge to take to the trails on a new set of wheels), the big question becomes: now what?
2. Pay down debt
One of the very first options you should consider is to use your windfall to reduce any short-term debt obligations that carry high interest rates, such as personal loans or credit cards. While this is certainly a good move, it’s important not to make a habit of relying on your annual bonus to settle debt. Bonuses are generally not guaranteed, so be careful not to run up debt with the idea that you’ll simply use your bonus to pay it off – you may end up disappointed (or in a financial fix).
3. Set up an emergency fund
It makes good financial sense to allocate a portion of your bonus to a “rainy day” fund (if you don’t already have one), that can be used as a safety net to cover unexpected once-off expenses, such as medical emergencies or critical home repairs. This can help you cover the cost of these unforeseen expenses without having to take out expensive short-term loans.
4. Invest for your future
Depending on which survey you read, the general consensus is that only about 6% of South Africans will be able to afford to maintain their standard of living in retirement. You may want to consider using your bonus to top up your retirement savings before the end of the tax year in February.
Another option is to open a tax-free investment. Investors can contribute up to R33,000 to their tax-free account each year, with a maximum allowable lifetime contribution of R500,000. Investment returns earned in the account (i.e. income and capital growth) are completely free from tax, as are any future withdrawals.
5. Reward yourself
Finally, it’s important to treat yourself and your family. But before you start swiping your credit card, decide on the percentage of your bonus that you will be allocating to “luxury expenditure” and stick to it. Anywhere between 10-15% is generally a good rule of thumb.
Using your bonus wisely can certainly help relieve financial pressure down the line. But if you’re fortunate enough to have no debt, a healthy savings pool and you’re on track towards your retirement goals, why not invest your bonus and have your money work for you?
At Prudential, we have a range of unit trusts for you to choose from. Try our Fund Selector Tool to find out which unit trust best meets your investment objectives. Alternatively, for more information, contact your financial adviser or call our Client Services Team on 0860 105 775 or email at query@prudential.co.za.
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