5 ways to use your bonus to better your financial position

Ahhhh, December! Nothing beats the smell of meat on the braai, the feel of sunshine on your skin, or the satisfying beep of your phone, alerting you that your much-anticipated year-end bonus has finally hit your account.

But is spending, spoiling or splurging the wisest use of these funds? Shouldn’t we be saving? Well, I am one financial advisor who is not going to tell you off for living a little.

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It’s been a long, hard year and you’ve worked hard for your money – so enjoy it, without guilt. Allocate a portion of your bonus to spoiling yourself, then direct the balance to something that will move you towards a healthier financial position.

Before rejoicing when you hear your boss mention “13th cheque”, it’s important to understand how your bonus is taxed. 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. If you get a 13th cheque, your annual income will increase to R390 000 – which effectively moves your total annual income into a higher tax bracket, which will impact your take-home pay.

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It’s important to do the calculation 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 expect.

Here’s five ways that you can use this lump to help put you in a better financial position.

1. Use it to cover the festive season expense: The festive season comes with a price tag. Being out of your normal routine – which likely sees you spending a good portion of your week at work – tends to lead to more spending.

To make matters worse, people typically get paid earlier in December, making the wait until January’s payday that much longer.

Budget some of your bonus towards covering your festive season expenditure, which will help keep you out of the red come January.

2. Pay off debt: Make a list of all of your creditors and see where depositing a lump sum might make the most sense.

Ultimately, debt eats into your disposable income, so try and get rid of as much as you can, as quickly as you can.

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3. Top-up your emergency fund An emergency fund is important, as life has a way of throwing financial curveballs at us, which can leave you severely out of pocket if not proactively planned for.

Redirect some of your bonus towards 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: Look for tax-efficient investments, such as a tax-free savings account.

This allows you to invest up to R36 000 tax-free before the end of the country’s financial year in February, so this is a great vehicle for your bonus.

5. Bump up your retirement savings: Finally, take advantage of tax savings by directing a lump sum towards your retirement annuity.

This is a great way of benefitting from the incentives that Treasury has put in place to encourage retirement savings