By Johan Werth
Ahhhh, December! Nothing beats the smell of meat on the braai, the feel of sunshine on your skin, or the satisfying beep of your phone, alerting you that your much-anticipated year-end bonus has finally hit your account.
This welcome lump sum is something you’ve probably looked forward to all year long, allowing you to splurge on something you’ve been lusting after, thanks to those extra few thousands lining your bank account.
But is spending, spoiling, or splurging the wisest use of these funds? Shouldn’t we be saving?
It’s been a long, hard year, and you’ve worked hard for your money – so enjoy it, without guilt!
I advise clients to allocate a portion of their bonus to spoiling themselves, which has a psychological benefit as it offers a sense of reward, then directing the balance of the lump sum to something that will move them towards a healthier financial position.
Before rejoicing when you hear your boss mention “thirteenth cheque”, it’s important to understand how your bonus is taxed. Many people think that their bonuses are taxed as per their monthly taxable income, but bonuses are taxed according to our annual income.
Let’s say you earn R30,000 cost to company per month, which is R360,000 per year. Your tax rate is R42,678 plus 26% of all taxable income above R237,100. Thus, if you get a thirteenth cheque, your annual income will increase by R30,000 to R390,000. This effectively moves your total annual income into a higher tax bracket, which will impact your take-home pay.
It’s therefore important to do the calculation – or wait until you see the breakdown on your payslip – before you start mentally spending those funds. Because of how bonuses are taxed, the amount paid out is likely to be quite a bit less than you were expecting.
If you’re lucky enough to receive a bonus, here are five ways that you can use this lump to help put you in a better financial position over time, in order of priority.
1. Avoid the red by using it to cover some of the festive season expense
The festive season comes with a price tag. Being out of your normal routine – which likely sees you spending a good portion of your week at work (and away from spending temptation) – tends to lead to more spending.
To make matters worse, people typically get paid earlier in December, making the wait until January’s payday that much longer. Budgeting some of your bonus towards covering your festive season expenditure, such as gifts, Christmas entertaining, groceries, etc, which will help keep you out of the red come January.
If your company pays you early in December, transfer your full salary to a separate bank account, and then transfer it back on the date you would normally have been paid. This stops you from accessing your salary prematurely, helping to lessen the risk of you running out of money too soon!
2. Pay off debt
You knew this was coming, didn’t you? Make a list of all of your creditors (and the interest rate of that debt), and seeing where depositing a lump sum might make the most sense. Credit cards typically have high-interest rates, says Werth, so it’s often worth tackling this debt first. “Ultimately, debt eats into your disposable income, so try and get rid of as much as you can, as quickly as you can.”
3. Top-up your rainy day fund
An emergency fund is important, says Werth, as life has a way of throwing financial curveballs at us, which can leave you severely out of pocket if not proactively planned for. For example, your geyser could burst, which is costly to replace. You might not have insurance, or you might have cover but still be faced with a hefty access. Redirect some of your bonus towards your rainy day savings, so that you have some buffer in the event of a financial emergency.
4. Put it in a tax-free savings account
Look for tax-efficient investments, such as a tax-free savings account (TSA). TSAs allow you to invest up to R36,000 tax-free before the end of the country’s financial year in February, so this is a great vehicle for your bonus.
5. Bump up your retirement savings
Finally, take advantage of tax savings by directing a lump sum towards your retirement annuity. This is a great way of benefiting from the incentives that Treasury has put in place to encourage retirement savings.
* Werth is the franchise principal and financial adviser at Consult by Momentum.
PERSONAL FINANCE