JOHANNESBURG - It has been a tough year for most South Africans, so the chance of the festive season being sweetened by a 13th cheque or bonus, and the possibility of extra spending money is welcome. But taking a longer view and using your bonus wisely could make life in 2019 a lot easier.
Instead of regarding a bonus as “extra money” that falls outside traditional income and can therefore be spent freely, investing your bonus will not only reduce stress, but could also pay handsome dividends
If your household budget is under pressure, the best thing to do is to use a bonus to reduce the pressure. The less you owe, the less you have to pay out of your hard-earned salary at the end of every month. In fact, using extra money wisely means that you can think about starting a savings plan for the benefit of the family.
There are several ways to put a bonus to work for you:
* Pay off debt. Pay off debts that attract the highest interest first. Usually this means tackling credit card debt first. Credit card interest can be 18percent a year or more, so by reducing your balance - or preferably getting it to zero - you will be saving money.
* Pay an additional instalment on your car. This will reduce your repayment period and also provide a buffer if you have a financial emergency. The credit in this account will mean you can use the cash normally reserved for a payment instead. This saves looking for a loan or putting more money on a credit card.
* Pay the bonus into your mortgage bond. This has enormous benefits, even if you make a one-off payment. The money credited to your account reduces the time outstanding on the bond. It also saves large amounts of interest when it is applied against the life of the bond.
For example, if you have a bond of R1000 000 over a term of 20 years at a rate of 10percent interest and pay in an extra R10000 as a once-off payment, this will be enough to cut your repayment period by seven months. You will also save R60000 in interest costs over the life of the bond. Considering that payment of the bond would be R9650 a month and that the additional payment is just R350 above this, the benefits are enormous.
* Invest in a fixed deposit. Investing bonus money in a fixed term account means that your money earns interest for a set period. The longer the period, the better the return. The initial bonus paid into a fixed deposit account can be withdrawn and reinvested. As it will have grown with interest the reinvestment amount will be larger. This will attract a higher interest rate. Eventually, the magic of compound interest will work for you and your money will grow significantly.
* Make a one-off investment in a unit trust. Using spare money to buy into a unit trust means investing in selected shares on the stock exchange and the performance of major companies. This should be regarded as a longer-term investment and is ideal if you don't need money immediately.
Errol Meyer is a legal specialist at Standard Bank Financial Consultancy.