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December for South Africans is one of the best months in the year because it brings sunshine in different forms.
Children are on a break from schoolwork, adults are on holiday from work, while some have received bonuses from their place of work.
Salem Nyati, Consumer Financial Education Specialist at the Momentum Group, says if you are fortunate enough to have received a bonus, pause for a minute before blowing your hard-earned cash on gifts and festive shopping.
Jürgen Eckmann, Wealth Manager and Franchise Principal at Consult, says before deciding how to use your bonus, it is important to ensure that you have a well-maintained budget, an emergency fund, and a long-term savings strategy.
“Once these foundational elements are in place, consider how your bonus can move you closer to your financial goals.”
Both Nyati and Eckmann agree that there are two ways you can use your bonus to improve your financial position: to pay off debt or invest.
But which one is better?
Here are some factors that can help you decide.
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Nyati advises people to use their bonus to pay off their debt. If the debt is not paid off, the amount one owes keeps accumulating interest, and on top of that, there is a debt servicing fee that you will need to take care of.
“Over time, it can spiral into a bigger and bigger problem, which is why paying off debt is the best investment.”
She says the aim is to be financially free, which debt will prevent you from achieving.
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Nyati adds that it is important to consider your interest rate when deciding between paying off debt or investing.
“If the interest rate is high, it makes sense to pay down debt first. Overdrafts, personal loans, and credit cards typically carry high interest rates – with the average credit card interest rate for November 2024 pegged at a whopping 24.62%.”
Another reason why it is better to pay off debt is your credit score.
“A low credit score can make it harder to qualify for loans, like a bond or car financing, or result in higher interest rates if you do get approved. Beyond borrowing, your credit score can also influence your insurance premiums or even whether a landlord will rent to you.
“Paying off debt is important for protecting your credit score, which plays a key role in your financial future. Tackle your high-interest debt first, especially if you have a lot of it before you think of investing.”
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Eckmann advocates for people to invest their bonuses. “With the caveat that you already have a plan in place for repaying debt, particularly high-interest debt as this can severely hamper your wealth-earning potential.”
He says if the money you owe has a reasonable interest rate, then it should not stop you from investing, especially towards a long-term goal.
He makes an example of saving towards retirement.
Let us say you earn R50 000 a month and receive a 13th check of R50 000 in December. By contributing your entire bonus into a retirement annuity, you unlock an array of benefits, starting with tax savings.
“If you are in the 30% tax bracket, contributing R50 000 into an RA immediately reduces your taxable income, resulting in a potential tax refund of R15 500 from the South African Revenue Service (Sars).
“That is a guaranteed return of 31% on your investment within a year, even before accounting for market growth. You could use the R15 500 to pay off debt, effectively achieving a dual benefit – growing your retirement savings while reducing your debt burden.”
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