If you’re living in South Africa, then there’s a very good chance the twelfth month on the calendar is your favourite time of year. The weather is great, the beach or pool beckons, and the air is filled with festivity as people wind down – or wind up – for the year. KeDezemba is here, and South Africans take it very seriously.
Part of the season’s appeal is that for those who receive a bonus, it generally lands in their account around this time. If you are one of the fortunate ones, pause a minute before you blow your year-end package on gifts or festive shopping, says Salem Nyati, Consumer Financial Education Specialist at the Momentum Group.
“Instead of spending your bonus frivolously, cleverly utilising this windfall can put you in a better financial position over time,” she says. Jürgen Eckmann, Wealth Manager and Franchise Principal at Consult, adds that before deciding how to allocate your bonus, it’s essential to ensure 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,” he says.
Both experts agree that two ways your bonus can put you in a better financial position is by using it to pay off debt or by investing it. But is it more beneficial to use that extra cash to pay down the debt you have accumulated or to direct it towards an investment that will grow over time?
We’ve asked our experts to make a case for each choice… leaving the ultimate decision up to you.
Pay down debt, says the Consumer Financial Education Specialist Debt is money you’ve already spent but still owe to someone, with the lender charging you extra (“interest”) for borrowing it.
“If you don’t pay it off, the amount you owe keeps growing because interest gets added to the balance, and then you’re charged even more interest on that, as well as debt servicing fees. Over time, it can spiral into a bigger and bigger problem, which is why paying off debt is the best investment, says Salem.
“The aim is to be financially free – debt hinders you in achieving this goal, as it siphons off a significant portion of your income.”
It is important to consider your interest rate when deciding between using your bonus to pay off debt or to invest, says Salem, adding that 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% APR.
Another compelling reason 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.
“You don’t own it if you still owe it, reminds Salem. “Tackle your high-interest debt first – especially if you have a lot of it – before you think about investing.”
Invest it!, says the Wealth Manager …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, says Jürgen.
“However, if the money you owe has a reasonable interest rate or is towards an asset – such as a bond (which you will likely be paying off over years to come) – this shouldn’t stop you from investing, particularly towards your long-term goals, like retirement.”
You can use your bonus to supercharge your retirement savings, says Jürgen. “Let’s 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 (RA), you unlock an array of benefits, starting with tax savings.
“If you’re 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’s 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.”
Additionally, funds in an RA grow tax-free, meaning no tax on interest, dividends, or capital gains, and assuming a conservative annual growth rate of 9%, your R50 000 bonus could grow into a lump sum of approximately R2.97 million by the time you reach retirement. “If converted into a retirement income, this could provide a monthly income of around R24 750 in today’s terms,” says Jürgen.
Regardless of which route you decide… …both experts agree that paying off debt or investing are good uses of your bonus, with the best choice for you being dependent on your personal circumstances.
“If you are unsure, always consult an experienced, impartial professional – such as a financial adviser – who will guide you in building and protecting your financial dreams,” says Jürgen.
Also see: Start the new season on a clean budget: Tips to spring clean your finances | Bona Magazine
