South Africans will be hoping for a year-end bonus to help fight the challenging economic environment.
Although there was a time when South Africans could bank on a year-end bonus – if only in the form of a 13th cheque – the bleak operating environment for businesses this year means that many will not get that year-end relief.
“Making matters worse, many of us (rely) on this annual bonus and live beyond our means during the year, expecting to use the proceeds to pay down this additional debt,” Ninety One’s Paul Hutchinson said.
“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 possibly 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).”
That said, for those who receive a bonus, there are still questions about what to do with it. Hutchinson thus provided a list of things that these “lucky” South Africans should consider:
South Africans who are not drowning in debt can give themselves a treat for working hard over the year.
“But be careful about 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,” Hutchinson said.
Paying off short-term debt
This is the most expensive form of debt and should be contained as quickly as possible.
Personal loans, outstanding credit card debt, and any store credit should thus be paid off.
“And while you’re at it, make a New Year’s Resolution not to take on any new short-term debt in 2024. Doing so will help to change your financial well-being,” Hutchinson added.
Investing in a Retirement Annuity
South Africans can invest 27.5% of their taxable income (up to a maximum of R350,000 per year) into a retirement annuity.
“Ideally, you should make this investment at the end of the tax year (February 2024) and then submit your tax return as soon as possible thereafter to get the tax refund.”
The refund can then pay off long-term debt, such as a mortgage.
Building an emergency fund.
As the name suggests, this fund is only used for times of crisis and not day-to-day living.
The emergency fund will stop you from using expensive credit or long-term investments.
“Target to accumulate at least six months of income in a money market fund for such emergencies.”
Investing in a Tax-Free Savings Account
South Africans can invest R36,000 into a Tax-Free Savings Account annually, not subject to income or capital gains tax.
They can thus be used to save towards a specific goal or supplement retirement savings.
Targetting Long-Term Debt
Bonus receivers can also use the additional funds to pay off their long-term debt.
“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.”
Put money into the unit trust fund.
South Africans can also get access to professionally managed investment by buying a set portion of a fund – A.K.A units.