Year-end bonus dos and don’ts

Research has shown that we spend money differently depending on how it’s earned. We are more responsible with money we worked hard for while tending to spend any windfalls. That explains why even the most financially astute person wants to spend their bonus by shopping, vacationing or renovating their homes.

Any money you receive should be used to improve your financial position. Here are some do’s and don’ts on dealing with your bonus, should you receive one, to help improve your finances:

Do: Save the money in an emergency fund

You should have at least three to six months’ worth of living expenses in an emergency fund to protect you against financial shocks like medical emergencies or losing your income. Your bonus gives you an excellent opportunity to start or top-up an emergency fund.

Do: Use the money to pay off debt

If you want to spend your bonus, why not spend it on paying off debt? Either select debt you want to settle or pay off the debt with the highest interest rate like a credit card or store account. Either way, the less debt you have, the better off you will be.

Do: Use the money to top up your retirement savings

By investing your money in a retirement annuity, you allow your money to grow, turning your small bonus into big savings over time. And an added bonus of contributing to a retirement annuity is that the contribution is tax-deductible within limits, rewarding you today and the day you retire.

Do: Pay for future expenses

No one knows what 2021 holds but we will still have bills to pay: school fees, DStv premiums and your new gym membership. Check with the providers and request a discount for paying upfront. By using your bonus to take care of the expense upfront, the savings can be put to use elsewhere.

Don’t: Forget to budget

Your bonus will be a nice boost to your bank account balance. But don’t forget it’s a once-a-year event and just because it’s the holiday season does not mean the budget goes out the window. Stick to your monthly groceries and entertainment budget to ensure you don’t start 2021 with a negative bank balance.

Don’t: Forget to say no

Your bonus can be shared with family and friends, but first, make sure your personal finances are in order and don’t be afraid to say no to extravagant requests.

Don’t: Spend your bonus on big-ticket items

Don’t use your bonus as a down payment on a vehicle or building a new swimming pool. With the new car comes monthly expenses like interest, insurance and maintenance, which could severely affect your finances every month. Before making any purchases, make sure you can afford it the other 11 months of the year.

Don’t: Forget to spoil yourself

For using your bonus to improve your finances, you deserve it. Use a meaningful portion of your bonus and spend it on something you enjoy, guilt-free.

Jaco Prinsloo is a certified financial planner at Alexander Forbes.

This article first appeared on Moneyweb and has been republished with permission

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