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Making better money choices with your bonus
Fortunate enough to get a bonus? Put it towards your long-term financial health.
As South Africa struggles with economic strain caused by a host of contributing factors, unemployment has reached a record high while the cost of living keeps rising. If you have a job paying regular wages or a salary, you’re in the fortunate group. If your salaried job comes with an annual bonus, you’re in an even smaller, more fortunate group.
A bonus may be written into your cost-to-company as part of your employment contract, or it may be an unexpected incentive the company pays employees as a reward for performing above expectations and increasing profits. An incentive is offered at the discretion of the employer, and the size of the bonus may be linked to your annual performance review and whether you met or exceeded the required outcomes.
This variability means you won’t generally include your bonus in your normal budget, which is based on known, predictable amounts like your salary and fixed monthly expenses. When you are paid your bonus, it can feel like ‘free extra money’, and you may be tempted to splurge it all on impulse.
Responsible budgeting doesn’t have to exclude fun
That’s an understandable urge – you want to reward yourself for all your hard work over the past year. But when you consider the extra work and commitment you had to put in to earn your bonus, why not plan how you can spend it to get the most value in the long run? Just as you do with your regular salary, you can draw up a budget to make the plan crystal clear.
You don’t have to cut out any ‘mad money’ to spend on anything you like, either. But just as you do with your monthly budget, spoil yourself only with the money that's left after you’ve made more important payments. You might choose to spend 80% on ways to improve your financial health, and the remaining 20% on treating yourself – but then you also need the discipline to stick to your plan.
We can suggest 4 ways to use your bonus wisely:
1. Pay off some debt
Home loans, car loans, personal loans, store cards, credit cards and overdrafts are all useful ways to afford what you need when you need it. Contrary to the stereotype, debt is not a sign of poor money choices. In fact, since you need to satisfy a lender with a healthy credit record and banks need to ensure a loan is affordable to you before they can grant it, debt can be a sign that you’re handling your money well. Managed properly, debt can enhance your life.
Using a portion of your bonus to boost your emergency fund is another way to speed up your long-term savings
But you can’t control external circumstances. If interest rates rise while you have several types of debt at variable rates, for example, you could find payments that were previously affordable becoming harder to make. Using part of your bonus to reduce your debt load could make your payments more affordable.
Even if you’re not worried about over-indebtedness, paying more into a debt than the minimum monthly instalment is always a good idea, because it shortens the repayment term and reduces your total interest payments. After hitting record lows in 2020, interest rates in South Africa have been increasing slowly. When you pay extra into any debt, it reduces the amount owed, which lowers the interest you pay on the remaining amount – a useful effect, when interest rates look set to keep rising.
If you pay off a debt completely, you can then add the former instalment to your monthly budget to pay more towards another debt, which will help to reduce your repayment term and once again save you money. Paying more than the minimum amount monthly also improves your credit score, which will help when you apply for more credit in the future.
2. Boost your emergency fund or other investments
You should already be saving in an emergency fund every month, to use when you need extra money urgently. If you don’t need to take on more debt to cover a financial emergency, you’re already saving on the cost of taking out a loan.
Using a portion of your bonus to boost your emergency fund is another way to speed up your long-term savings. Ideally, an emergency fund should be enough to cover your expenses for at least 3 months, although enough to cover 6 months gives you even more security. But because you need access to the money immediately if disaster strikes, you’ll probably keep it in a savings account like JustInvest, available on the Nedbank Money app, which allows you to withdraw the money at 24 hours’ notice.
The very act of drawing up a bonus budget has mental benefits too – it’s a commitment to sharpening your budgeting skills
The trade-off on instant availability is that your savings earn interest at a lower rate than they would in accounts designed for the long term. The faster you have your target amount saved in your emergency fund, the sooner you can start putting those monthly payments into a long-term investment with a better interest rate instead. So, using part of your bonus to boost your emergency fund could indirectly boost your retirement investments or your tax-free investments. If you’ve already reached your emergency fund target, you could use part of your bonus to boost your other investments.
3. Renovate your home
Your home is probably your biggest investment. Many people have experienced working from home over the past 2 years, and for some this has become permanent. There’s nothing like being at home all day, every day, to make you keenly aware of improvements you could make in your domestic space – like walls that need a new lick of paint or pipes that need replacing.
Your bonus might provide a wonderful opportunity to get renovating and make your home more comfortable. However, avoid over-capitalising, which means spending more on renovating than you will eventually be able to sell it for. Remember, a makeover should enhance the value of your property so that when you do decide to sell it, it fetches a better price.
4. Spoil yourself
After taking care of the serious part of your bonus budget, treat yourself to something nice as a reward for being financially responsible. It could be a material purchase – a pair of shoes you’ve had your eye on, or a dream holiday to recharge with your family. You could also use your bonus to invest in yourself. If there’s new skill or hobby you’d like to learn, or instructive books on subjects that interest you but have always been ‘too expensive’ before, you have a golden opportunity to spoil yourself with your bonus and improve your life.
Our 4 suggestions are all material ways to use your bonus wisely, but the very act of drawing up a bonus budget has mental benefits too – it’s a commitment to sharpening your budgeting skills and making better money choices. Your bonus can help you turn over a new leaf when it comes to making smart financial decisions.
