Investment insight: What to do with your annual bonus
By Bryan Hirsch
Each year around December I’m requested to provide my views on what to do with a
This year I’ve decided to pre-empt the question to give readers a chance to think both earlier and more carefully about the decision.
Hopefully, you are one of the luckier people receiving a bonus.
However, for many my suggestions won’t apply as they have already budgeted to use the bonus to pay off debt or to fund a holiday. There is nothing wrong with either decision. I am in full support.
For the rest, read on.
Wise families calculate their budgets by taking both tax and annual expenses off annual earnings. This is the only real way to budget so if you fall into this category – full marks. For those who don’t, it’s time to start doing so.
This has been a tough year for South African consumers, with higher interest rates on housing bonds and other monthly debt, such as HP and leases on cars, furniture and household appliances. The interest rate hikes were accompanied by an increase in petrol and food prices through a weaker rand for most of the year, with the resultant higher inflation creating great strain.
So what to do with your bonus?
First, reduce debt wherever possible. Borrowed money allows us to increase our standard of living, so most of us have some form of debt. If your monthly disposable income is sufficient to fund that debt, my view is to continue as is. If not, use your bonus to settle the big debts on which you pay the highest rate of interest. This is likely to first be your credit card, then your bank overdraft.
The ability to cope with debt without feeling stressed is the real issue.
Next, consider a well earned rest to recharge your batteries. Do not fall into the common trap of paying for your holiday by credit card, then using your bonus for expenditure like a TV or DVD. Rather deposit the bonus into your credit card account to pay for the holiday.
What about buying a gym membership for the family? A healthy lifestyle pays dividends, not least of all providing the motivation to build your career, probably with higher salaries and bigger bonuses in the future. Employers like energetic, healthy and motivated staff. If you’ve seemed tired, lethargic and demotivated, the new exercise regime could change your employer’s perceptions of you to your future benefit.
If you need to buy foreign currency, do it now. While the rand is reasonably strong at the moment, it could weaken in the months to come. If you are going abroad, you have most likely calculated the costs at a much higher exchange rate than it is now. So the strengthening currency should work to your advantage, bringing down the cost of foreign travel.
If you are looking to save your bonus, your first effort should be directed at receiving it in a tax efficient form. Instead of receiving the bonus in your own hands, ask your employer to investigate investments through the company, such as an increase in contribution to your pension or provident fund, or receiving a deferred compensation offer from your employer. These options will result in payment of tax on the bonus being deferred.
With the bonus in your own hands, if you are within 15 years of retirement, check whether you have the capacity to increase your retirement annuity by a single premium equal to the bonus. Other savings options that could be considered, although not as tax efficient, are the purchase of an endowment policy or unit trusts, or even making a fixed deposit investment, which is
attractive at the high interest rates currently being offered. Just bear in mind that under the age of 65 you only get the first R6 000 of interest tax free.
After tax efficient options, the best place to put your bonus is into your home loan. Remember that for every R2 500 you invest in your bond at a 15% to16% interest rate, you will save approximately R40 000 in interest over 20 years. If you have an access bond, “parking” your bonus will provide you with a tax-free return equal to the interest being charged on the bond.
Finally, don’t forget school and university fees that may need to be paid in 2003 – and in the future.
Whatever you do with your bonus, it is essential that you sit down and assess your situation before making a final decision on how to use it. This is probably the easiest aspect of a very tough year!
Bryan Hirsch is Chief Executive Officer of Pioneer International Financial Advisors. Contact him on +27 11 8804710 or by e-mail on email@example.com