December is fast approaching and hopefully you will be lucky enough to receive a bonus. Michael Kirkpatrick of Alexander Forbes Retail, says that before you spend your bonus, you should consider what top–up savings and investment options are available.
He adds that a bonus provides a great opportunity to boost savings.
According to Kirkpatrick the following opportunities can boost your savings and create financial well-being: Paying off debt, setting up an emergency savings or healthy savings fund, and opening a tax-free savings account.
1. Paying off debt
If you have unsecured debt that has a high interest rate attached, it is a good idea to pay this off as quickly as possible. The interest paid on credit cards and short-term loans is a wealth destroyer.
1. Set up an emergency savings fund
Use it to create or top up an emergency savings fund, which is otherwise difficult to build, given that budgets tend to be fairly tight every month. Kirkpatrick offers the following example: “If you set aside 5% of your salary every month, it would take nearly two years to save one month’s salary.” Having a capital sum available allows you to set up a healthy savings fund immediately, creating breathing room for when life throws the unexpected at you. Options range from an access bond, which helps reduce the amount of interest payable, to a separate bank account or a cash-based unit trust investment.
1. Set up a healthy medium to long term savings fund
Kirkpatrick says that it is important to distinguish between needs and wants, as this is the first step to making long-term savings count so that you can secure what matters most to you. Having a lump sum available to inject into these investments can go a long way to helping you reach your retirement and other financial goals that you want to achieve. “An added benefit of using your bonus to top up your retirement fund or retirement annuity fund, is that the extra contribution made will give you a tax benefit if you are within the tax deductible allowance of 27.5% of remuneration or taxable income.”
1. Tax-free savings account
Another great option for building savings is to use a tax-free savings account. The beauty of this is that the returns generated in the investment are not taxable. The only downside is that these accounts have an annual contribution limit of R30000 as well as a lifetime contribution limit of R500 000.
“Using your bonus to top up savings is a far better end of year present for your loved ones than anything wrapped in a box, as this will help to secure the family’s financial well-being,” concludes Kirkpatrick.