Old Mutual’s tips on how to spend your year-end bonus sensibly

The end of the year looms and despite the challenging times some businesses may still be able to thank their employees for their hard work through an end-of-year bonus. Other workers may have had an unexpected cash windfall from the taxman.

Bonuses are often spent before they are received as employees anticipate payment. But this year may be a good o­ne to practice bonus restraint.

“Since this is the season of giving, your first temptation will undoubtedly be to give yourself or your family a little something. We all deserve some spoiling, particularly when we have worked hard during the year. But we also need to consider living for the future. It’s a question of striking the right balance. The principle of diversifying your investments applies to your bonus, too. Diversify what you do with the extra cash,” suggests Andrew Ruddle, Investment Product Manager at Old Mutual.

Ruddle says that o­nce you’ve spoiled yourself, you should consider keeping some money aside to pay your way during the festive season. By using some of your extra cash in this way, you can avoid going into debt.

Consider making inroads into your debt – focussing first o­n accounts with the highest interest rates, such as your credit cards and shop cards.

Debt is a major obstacle to financial security. Beware of being caught in a debt spiral. You incur debt, clear it with your annual bonus, and then promptly spiral into debt again. Responsible money management requires a change of habit. In fact, why not try to pay cash for as many of your purchases as possible?

Using a debit card to make purchases instead of a credit card will ensure that you don’t spend money that you don’t have.

Once you have cleared your debts and are working o­n a cash basis, you will have space to start thinking about investing your money for important, longer-term goals, making your money work for you and not for your creditors.

You might consider paying an additional amount into your home loan. The advantage of paying off your bond is that if you need the cash in an emergency you may be able to access it but in the meantime you are reducing your interest burden.

(A word of caution, though. A great deal of discipline needs to be exercised to avoid borrowing from a home loan to finance short-term luxury items. There is the danger that by the time you reach retirement your home loan will still not have been paid off. You might end up using valuable retirement capital to do this, and run the risk of having an enormous shortfall in retirement.)

And don’t lose sight of your important life goals, such as saving for your children’s education, building up savings for emergencies, and for retirement, and taking out cover for catastrophic health events.

No matter what your dream or goal, the sooner you start saving for it, the better. Someone o­nce called compound interest the greatest force in the universe, and why not? The effect of interest earned upon interest already earned is a dramatic snowballing of the money at your disposal. Remember that it is time in the market that counts!

“Assuming your money grows at an annual rate of 10%, R5000 invested today could be worth R12969 in 10 years time - after all charges have been taken into account,” says Ruddle. “If you do this every year, you’ll be amazed at how much you have accumulated over 10, 15 or 20 years.

“Work with a competent financial adviser o­n structuring an action plan to enable you to invest in your future whilst still living within your means today,” concludes Ruddle.