In­stead of frit­ter­ing it away, make your an­nual bonus work for you

Weekend Argus (Saturday Edition) - - FINANCE -

You could do worse than in­vest your an­nual bonus, con­sid­er­ing that you are likely to re­ceive only 20 to 30 such bonuses dur­ing your work­ing life.

Rob Formby, the di­rec­tor of re­tail op­er­a­tions at as­set man­ager Al­lan Gray, sug­gests that you pre­tend you did not re­ceive the bonus and that you in­vest the money for your long-term fi­nan­cial se­cu­rity.

“You could also save the money to­wards a spe­cific goal, such as your chil­dren’s ed­u­ca­tion,” he says.

Formby says you should con­sider unit trusts as a sav­ings ve­hi­cle. He pro­vides the fol­low­ing ex­am­ple to show the po­ten­tial dif­fer­ence in re­turns you could have earned over the past year from a stock mar­ket in­vest­ment com­pared with the re­turns from a bank sav­ings ac­count.

If you had saved R100 a month in a bank ac­count for 36 years, from the end of Septem­ber 1974 un­til the end of Septem­ber 2010, and earned the av­er­age money mar­ket re­turn of 12.9 per­cent a year, your in­vest­ment would have grown to R349 459 af­ter tax (cal­cu­lated at 25 per­cent). On the other hand, if you had in­vested R100 a month on the stock mar­ket over the same pe­riod and re­ceived the same an­nu­alised re­turn as the FTSE/JSE All Share in­dex (19.2 per­cent a year, in­clud­ing div­i­dends), your money would have grown to R4 302 974.

If you don’t yet have a re­tire­ment plan in place, you could use your bonus of, say, R8 000 as a great kick-start for your re­tire­ment sav­ings and fol­low it up with monthly sav­ings con­tri­bu­tions.

Steven Braudo, from group and re­tail strat­egy at Lib­erty Life, says that if you get an an­nual in­crease with your bonus, you could use the in­crease to add to your in­vest­ment ev­ery month.

“You may think that sav­ing, say, R500 a month may not be worth it, but if you in­vest for six years at a re­turn of eight per­cent, you will have R36 500 af­ter five years and R294 000 af­ter 20 years,” he says.

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