As we head into bonus time, these tips will ensure you use any windfalls you receive responsibly
Acash windfall, whether it’s expected or not, can have a huge impact on your financial security. It’s wise to plan how you’re going to spend the lump sum and consider your short- and long-term financial goals. Think about what you’re hoping to achieve financially in the next six months or year. How can this extra money help you accomplish those goals?
SETTLE YOUR DEBTS
Before spending any of your windfall, it’s essential to make a lump sum payment to reduce your interest. First settle the debts with the highest interest rates, as they’re more expensive to service over the repayment period. These include credit card debts, micro-loans and overdrafts. Then tackle lower interest-bearing debts, which are usually linked to high-value assets such as cars and houses. Paying off your debts will also free up more disposable income in the long term, making monthly money management easier. – Thando Sithole, financial planner
Having paid off your debts, you’re in a great position to save what’s left of your windfall. Consult a financial advisor to help you to develop an investment plan that could include various short- or long-term investment vehicles.
One good option is an endowment plan, which provides a low-cost opportunity to save for mediumterm goals. You can access your capital after five years of contributing to your fund. Funds saved within an endowment are taxed at 30%. So, if your personal tax rate is above 30%, you benefit from the difference in your personal tax rate and that of the endowment, which is 30%. Be aware that if your personal income tax rate is lower than 30%, you’ll pay higher tax than you need to on your endowment policy, so this may not be the best savings vehicle for you.
Flexible investment plans are also a good choice because they offer immediate access to funds, which can be invested in a variety of portfolios. Investors also enjoy the advantage of annual, local interest tax exemption of up to R23 800. Bear in mind that this investment vehicle generally has higher investment fees. – Claire van Wyk, Financial Advisor: Discovery
SAVE FOR RETIREMENT
According to a study by the World Bank, only 6% of South Africans can afford to retire comfortably. This is because many begin saving for retirement too late or aren’t saving an adequate percentage of their income. The rule of thumb is that you’ll need about 75% of your income to retire comfortably, which means you need to save around 15% of your lifetime working salary. Factors such as medical expenses and inflation will affect your cost of living during your retirement years, so it’s important to start planning and saving as soon as possible.
One of the benefits of a retirement annuity (RA) is its tax benefit. Legislation allows for 27,5% of your income to be invested into a RA, which is capped at R350 000 per annum. This allows for tax-free growth, as there’s no income or capital gains tax payable while your funds are invested. Upon retirement, you’re also given tax relief up to R500 000 on the lump sum withdrawal. – Gabrielle Patel, private wealth banker
SAVE FOR YOUR CHILDREN’S EDUCATION
Education in SA carries a big price tag and a study by Old Mutual shows that it’s increasing. This, coupled with the rising cost of living, means it’s crucial for parents to use cash windfalls to save for their children’s education fees.
One way of doing so is by paying for a full year’s tuition at the start of the academic year, since most schools offer a 10-15% discount to those able to do this. You could also save the money in a tax-free savings account, which allows parents to save a maximum of R2 750 per month, not exceeding R33 000 per annum.
For short-term savings, a good interest-bearing account will do. Shop around for the bank which offers the best interest rate. For a long-term education fund, parents can also invest in unit trusts and exchange-traded funds, contributing anything from R500 per month upwards, as well as any lump sum amount. – Mapalo Makhu, founder of Personal Finance Coach and Woman&Finance
Day-to-day money management can be stressful, what with living expenses, bonds, car repayments and school fees to pay. To perform at your best, it’s important to treat yourself from time to time. So once you’ve taken financial care of the important things, put some money aside for enjoyment.
Have you been meaning to service your car, make renovations to your home or buy furniture? Use some of your bonus to pay for these things. Alternatively, make a list of items or experiences you’re longing for and save towards them. You deserve a bit of fun! – Lerato Msomi, financial advisor
First settle the debts with the highest interest rates, as they’re more expensive to service over the repayment period.