Making the most of your 13th cheque
As the end of the year draws near most people are expecting some kind of Christmas bonus or 13th cheque from their employers. It’s hugely tempting to blow your bonus on the hottest high-tech, designer gear or as a deposit on a flashier set of wheels, but resisting temptation could pay long-term financial dividends.
“A bonus is a fantastic opportunity to buy yourself a little financial freedom, but all too often young people starting out are keen to show off how well they’re doing spend the money on things that have little long-term financial value” says Bryan McLachlan, Head: Nedbank Transactional & Investment Products.
He says that with the two recent interest rate rises and more expected, paying off or reducing debt such a student loan or car finance can be a wise way to spend your bonus, because it’ll save you money in the long-run.
By paying off a lump sum, you can reduce the capital you owe and save on the interest. Interest doesn’t buy anything, it is simply the cost of borrowing money.
“Of course if you have short-term debt, such as shopping accounts or short-term loans pay these off first, because they generally attract higher interest rates. And make a New Year’s resolution not to buy luxuries on credit – unless you’re very careful it can seriously undermine your financial health,” says McLachlan.
He says it’s worth distinguishing between types of debt. For example a home loan enables you to buy an appreciating asset that over time can give you financial security. Contrast this to buying an MP3 player or designer jeans on credit. There is no financial benefit and the interest payments mean you’ll end up repaying far more than the item is worth
A lump sum can also be a great way to kick-start a savings or investing habit. If you want to grow your cash reserves and build an emergency fund, the first option to consider is individual savings accounts, such as the Nedbank JustSave Account.
If you have a healthy cash reserve, consider an investment account which offers higher returns. Nedbank offers a range of products to suit your needs, depending on how much you can invest, and how long you can put your money out of reach.
If you’ve sorted out your debt and have a little spare cash you may want to start thinking about your longer-term financial well-being. Although your bonus will be taxed you can offset this to some extent by increasing pension fund or retirement annuity contributions, as there are tax breaks on these up to a certain level.
“But also remember to have some fun. You earned it, so set some of your bonus aside to reward yourself for all the missed lunches, late nights and early mornings,” says McLachlan.
