Maximising Your Bonus
Paul Hutchinson, Sales Manager, Ninety One
There was a time when we were all certain of a year-end bonus, if only in the form of a 13th cheque. Admittedly, in some instances this was ‘self-funded’ by making a monthly contribution, but the result was the same, an additional amount at the end of the year. However, as with employment for life, the changing work environment and the world’s ongoing financial challenges have put paid to any bonus or 13th cheque for many.
Making matters worse, many of us ‘bank’ on this annual bonus and live beyond our means during the year, expecting to use the proceeds to pay down this additional 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. For them, financial discipline is going to have to be their mantra, and in a financial emergency, the accessing of the savings component of their retirement fund, with the recent introduction of the two-pot retirement system. Failing that, they may need to make a call to a National Credit Regulator-accredited debt counsellor (anyone who, after deducting living expenses from their net salary, has less cash left over than the instalments on their total debt, may apply for counselling).
So, you received a year-end bonus. Now what?
However, for the fortunate few that do receive a bonus this year, the perennial ‘What to do with this windfall?’ question arises. Except for the opportunity provided by the introduction of Tax Free Savings Accounts there is nothing new in the answer either. If you have received a bonus you should consider:
Spoiling yourself – within reason and only if you are not drowning under a mountain of debt, in which case use the entire proceeds to reduce this debt!
No doubt you have worked hard during the year, and you should take the time to reward yourself and your family for this effort. But be careful on how much you spend. A good rule of thumb is that you should be investing at least 10% of your monthly after tax income. The corollary here should be, do not spend more than 10% of your after tax bonus.
Paying off short-term debt e.g., personal loans, outstanding credit card debt and any store credit. This is the most expensive form of debt and needs to be brought under control or paid off ASAP. And while you’re at it, make a New Year’s Resolution not to take on any new short-term debt in 2025. Doing so will help to change your financial wellbeing.
Build an emergency fund. Target to accumulate at least six months income in a money market fund, and use it for exactly that: emergencies only, not day-to-day living expenses. An emergency fund is required if you are retrenched and don’t have an income for a few months or need to pay an unexpected medical bill, for example. This emergency fund will prevent you from having to access the savings component of your retirement fund, expensive credit or long-term investments.
It is worth noting just how punitive using the savings component of your retirement fund is. Not only will you pay an administration fee and be subject to income tax at your marginal tax rate on the amount that you withdraw, but you will also put at risk your ability to retire comfortably. By making a concerted effort to accumulate an emergency fund you can preserve your long-term savings for the intended purpose – a comfortable retirement.
Investing up to 27.5% of your taxable income (up to a maximum of R350 000 per year) into a low cost, new generation retirement annuity (RA) available from linked investment service providers, like Ninety One Investment Platform and then into an appropriate unit trust fund. Ideally you should make this investment at the end of the tax year (February 2025) and then submit your tax return as soon as possible thereafter to get the tax refund. You could then immediately use the tax proceeds of the refund to pay off long-term debt e.g., your home mortgage or, if you do not have long-term debt, allocate to an investment.
Investing up to the current annual limit of R36000 into a Tax Free Savings Account (TFSA). TFSAs provide South African investors with an opportunity to save towards a specific goal or supplement their retirement savings. As TFSAs are not subject to income or capital gains tax, they provide a convenient and flexible way to accumulate savings over time. A good entry point for your TFSA investment is a linked investment service provider (Ninety One Investment Platform). In addition to the fact that investment platforms offer an extensive choice of local and international funds covering all risk profiles, asset classes and sectors, you also have the flexibility to switch between them.
Allocating most of whatever remains to pay off long-term debt again.This will reduce some of the pressure on your monthly financial situation, particularly if you have a home loan as interest rates have increased materially over the past few years. Should you have an access home loan facility you can also consider this additional contribution as part of your emergency fund.
Finally starting an investment into an appropriate unit trust fund. Unit trusts allow you access to professionally managed investments by buying a portion of a fund, also known as units.
Successfully managing one’s financial affairs, like exercise, requires effort. Often one needs to be shocked into beginning to exercise and live a healthier lifestyle. If the rollercoaster of the last few years is not the investment equivalent of the heart attack that shocks us all into starting to invest for the future, unfortunately nothing will.