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