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South Africans should not waste their bonuses, but treating one’s self to a treat is perfectly acceptalbe.
But is spending, spoiling or splurging the wisest use of these funds? Shouldn’t we be saving?
“It’s been a long, hard year, and you’ve worked hard for your money – so enjoy it, without guilt,” Johan Werth, Franchise Principal and Financial Adviser at Consult by Momentum, said.
That said, South Africans should not try and make their bonsues last passed December.
“I advise clients to allocate a portion of their bonus to spoiling themselves, which has a psychological benefit as it offers a sense of reward, then directing the balance of the lump sum to something that will move them towards a healthier financial position,” Werth added.
It is also important to understand how a bonus is taxed in South Africa.
“Many people think that their bonuses are taxed as per their monthly taxable income, but bonuses are actually taxed according to our annual income,” he said.
“Let’s say you earn R30,000 cost to company per month, which is R360,000 per year. Your tax rate is R42,678 plus 26% of all taxable income above R237,100. Thus, if you get a thirteenth cheque, your annual income will increase by R30,000 to R390,000. This effectively moves your total annual income into a higher tax bracket, which will impact your take-home pay.”
“It’s therefore important to do the calculation – or wait until you see the breakdown on your payslip – before you start mentally spending those funds. Because of how bonuses are taxed, the amount paid out is likely to be quite a bit less than you were expecting.”
Not all South Africans are guarenteed a bonus this year, and Werth has given five suggestions to help the lucky South Africans manage their finances over time.
If you’re lucky enough to receive a bonus, Werth suggests five ways that you can use this lump to help put you in a better financial position over time, in order of priority.
1 – Avoid the red by using it to cover some of the festive season expense
The festive season comes with a large price tag, and South Africans tend to spend more time out of their normal work routine, leading to increased spending.
People also get paid earlier in December, meaning that the wait until January is far longer.
Werth said that budgeting some of the bonus to festive season expenditure, such as gifts, Christmas entertaining, groceries etc, will help ensure that there is enough money for Janauary.
“If your company pays you early in December, transfer your full salary to a separate bank account, and then transfer it back on the date you would normally have been paid. This stops you from accessing your salary prematurely, helping to lessen the risk of you running out of money too soon,” he added.
2- Pay off debt
Bonus recievers should make a a list of all of their creditors (and the interest rate of that debt) and see where making a large lump sum makes the most sense.
As credit cards have higher interest rates, it can be benficial to tackle this debt first.
“Ultimately, debt eats into your disposable income, so try and get rid of as much as you can, as quickly as you can.”
3 – Top-up your rainy day fund
An emergency fund is important and can help if there are any finanical curveballs.
“Redirect some of your bonus towards your rainy day savings, so that you have some buffer in the event of a financial emergency.”
4 – Put it in a tax-free savings account
Tax-free savings account (TSA) allows South Africans to invest R36,000 tax-free before the end of the country’s financial year in February.
5 – Bump up your retirement savings
Werth said that South Africans can also take advantage of tax savings by directing a lump sum towards their retirement annuity.
“This is a great way of benefitting from the incentives that Treasury has put in place to encourage retirement savings,” said Werth.
Read: Tough times for middle-class South Africans earning R15,000 a month
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