Before you blow your bonus ...

RESIST THE URGE TO SPEND IT ALL ON GIFTS AND ENTERTAINMENT With consumers and savers facing a tough 2017, you need to put your year-end bonus to work so that you can reap long-term rewards. has some advice.

It’s been a tough year for many South African businesses, and perhaps your employer has decided against giving the staff year-end bonuses, or is paying a reduced bonus. If you are fortunate enough to receive a substantial bonus on top of your regular salary, think about how it could help you and your family financially over the long term before blowing it on expensive gifts, lavish entertaining or a luxury summer holiday.

Economists predict that 2017 will not be much easier than 2016 for consumers and investors; it may even be tougher. In a year’s time, you may regret not having put your bonus to more productive use.

In the latest GrayIssue newsletter to investors, Allan Gray’s business development manager, Bekithemba Mafulela, quotes the philosopher Viktor Frankl: “Between stimulus and response, there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.”

Mafulela says many of us have a “winning-the-lotto” response when we receive a bonus – in other words, we see it as an unexpected windfall that is not part of our regular income, and so we often spend it “in very poor ways”.

He says that, by creating a space between the (financial) stimulus and your response, “you can stop being a slave to over-spending or accumulating consumptive debt and set yourself on a path of financial security and wealth creation”.

With this in mind, you should carefully plan your holiday-season spending and use what you can of your bonus either to reduce your debt or to boost your savings.

HAVE A SPENDING PLAN

“Expecting things to just work themselves out is not a good strategy for approaching the festive season,” Mafulela says. “Plan how you will allocate the money before the rush of blood to the wallet that happens when the bonus arrives.” And try to resist the wily ways in which retailers persuade you to part with your cash: the flurry of newspaper inserts advertising specials; the festive lights and decorations that signal the start of the spending spree; and stores designed to make you spend by, for example, using “roadblocks and labyrinths” to divert your attention and placing tempting treats where you queue at the tills. “Being aware of these cues and influences can give you a leg up when everything around you is pushing you to spend,” Mafulela says.

A plan includes drawing up a budget for gifts and entertaining – and sticking to it. Simply enjoying the company of family and friends over the holiday season counts more than trying to impress them with pricey gifts and over-the-top catering.

REDUCE YOUR DEBT

The best way – by far – to use your bonus is to reduce your debt. Michael Kirkpatrick, best-practice specialist at Alexander Forbes Retail, says that if you have unsecured debts with high interest rates, such as a personal loan or store card debt, it is a good idea to pay them off first. “The interest you pay on credit cards and short-term loans is a wealth destroyer,” he says.

You may also think of reducing longer-term debts, such as a car loan or home loan. The interest you are paying on these loans is likely to be more than the returns you could earn on a low-risk investment, and you’ll be well rewarded in years to come, perhaps when you really need the extra cash.

Errol Meyer, the senior manager of advisory propositions at Standard Bank, says there are major benefits to paying off a home loan before time, and the more time left on the mortgage bond, the higher the saving you will achieve. “Having a home that is paid off means that a major asset is secured for the future,” he says.

SAVE, SAVE, SAVE

Using your bonus to top up your savings is a far better end-of-year present to your loved ones than anything wrapped in a box, because it will help to secure your dependants’ financial well-being, Kirkpatrick says.

There are different ways to save, depending on whether your financial goals are short or long term, and there are savings or investment vehicles appropriate to each. You need to decide where your bonus will serve you best. • Emergency fund. Financial advisers recommend that your emergency fund equals at least three times your take-home pay. Kirkpatrick says your bonus is a good way to establish or top up an emergency fund, because it will take much longer if you set aside an amount each month. If you set aside five percent of your salary each month, it will take nearly two years to save one month’s salary, he says. “Having a capital sum available allows you to set up a healthy savings fund immediately, creating breathing room for when life throws the unexpected at you.”

You may have to withdraw the money in your emergency fund at short notice, so your investment options range from a bank savings account to a money-market unit trust fund. Don’t expect to make big returns on such an investment, although they should at least be in line with the inflation rate. • Medium-to-long-term savings. These are savings that can benefit from a longer period in the markets, which should translate into higher returns than on a savings account, for example. You may be saving for a big expense, such as a deposit on a home or your child’s tertiary education. Your options include higher-risk unit trust funds with investment horizons of three to five years or longer, in which some of the investment will be in growth assets, such as equities and listed property. The longer the term, the more exposure you can afford to have to growth assets.

Banks offer more attractive interest rates on longer-term fixed deposits, such as those with fiveyear terms, but remember that, although the return may be guaranteed, it is fixed for the period of the deposit (which may be to your disadvantage if interest rates rise), and you can’t access your money before the term is up. • Retirement savings. Kirkpatrick says that injecting a lump sum into a retirement fund, such as your employer-sponsored fund or a retirement annuity fund, can go a long way to help you reach your savings target. And there are tax advantages: your contribution is tax-deductible if it falls within the allowable limit of 27.5 percent of your remuneration or taxable income, and all returns within the investment are tax-free. • Another option is a tax-free savings account, which can be in the form of either a unit trust or bank savings account. Like retirement fund investments, the returns within the investment are free of tax, although the contributions are not tax-deductible. The accounts have an annual contribution limit of R30 000 (which can be a lump sum) and a lifetime contribution limit of R500 000.