How you should use your year-end bonus in South Africa
Many South Africans are set to receive a bonus, with experts stating that the funds should be used to pay off debt or invested.
Salem Nyati, Consumer Financial Education Specialist at the Momentum Group, said that the lucky South Africans who have received a bonus should hit pause before splurging on gifts or festive season shopping.
“Instead of spending your bonus frivolously, cleverly utilising this windfall can put you in a better financial position over time,” said Nyati.
Jürgen Eckmann, Wealth Manager and Franchise Principal at Consult, added that before deciding how to allocate your bonus, it’s important to have a well-maintained budget, an emergency fund, and a long-term savings strategy.
“Once these foundational elements are in place, consider how your bonus can move you closer to your financial goals,” said Eckmann.
Both experts agreed that the two best ways to use your bonus is to use it to pay off debt or invest it.
Pay down debt
Debt is the money that has already been spent, but you still owe it to someone, with the lender charging you interest for borrowing it.
“If you don’t pay it off, the amount you owe keeps growing because interest gets added to the balance, and then you’re charged even more interest on that, as well as debt servicing fees. Over time, it can spiral into a bigger and bigger problem, which is why paying off debt is the best investment, said Salem.
“The aim is to be financially free – debt hinders you in achieving this goal, as it siphons off a significant portion of your income.”
It is also important to consider the interest rate when deciding between using your bonus to pay off debt or investing, adding that high interest rates mean that it is harder to pay down debt first.
Overdrafts, personal loans and credit cards generally carry high interest rates.
Another compelling reason to pay off credit is that it affects your credit score.
“A low credit score can make it harder to qualify for loans, like a bond or car financing, or result in higher interest rates if you do get approved.”
“Beyond borrowing, your credit score can also influence your insurance premiums or even whether a landlord will rent to you. Paying off debt is important for protecting your credit score, which plays a key role in your financial future.”
“You don’t own it if you still owe it, reminds Salem. “Tackle your high-interest debt first – especially if you have a lot of it – before you think about investing.”
Invest it
For those who already have a plan in place for repaying their debt, investing is a good idea.
“If the money you owe has a reasonable interest rate or is towards an asset – such as a bond (which you will likely be paying off over years to come) – this shouldn’t stop you from investing, particularly towards your long-term goals, like retirement,” said Eckmann.
You can also use your bonus to supercharge your retirement savings.
“Let’s say you earn R50 000 a month and receive a 13th check of R50 000 in December. By contributing your entire bonus into a Retirement Annuity (RA), you unlock an array of benefits, starting with tax savings.”
“If you’re in the 30% tax bracket, contributing R50,000 into an RA immediately reduces your taxable income, resulting in a potential tax refund of R15,500 from the South African Revenue Service (SARS).
“That’s a guaranteed return of 31% on your investment within a year, even before accounting for market growth. You could use the R15,500 to pay off debt, effectively achieving a dual benefit – growing your retirement savings while reducing your debt burden.”
Moreover, funds in an RA grow tax-free, meaning no tax on interest, dividends or capital gains. Assuming a conservative annual growth rate of 9%, your R50,000 bonus could grow into a lump sum of approximately R2.97 million by the time you retire.
“If converted into a retirement income, this could provide a monthly income of around R24,750 in today’s terms,” says Jürgen.
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