Your annual bonus: aspire, invest, insure

Maxwell Mojapelo, retail investment analyst at Sanlam Investments.

Deciding what to do with your annual bonus or windfall really is no different from deciding how to invest what’s left of your salary every month. The first step is to set aside some time to envision your future and consider the different reasons why you may want to - and need to - invest, and then choose the appropriate investment options.

What do you aspire to?

Firstly, you may have aspirational reasons, such as buying a new car or a property. If you only need the money in five years’ time or later, you can afford to invest in a diversified portfolio or unit trust with a large component of shares. The shorter the time horizon, the smaller the shares component should be. If you could possibly need the money within the next year, it’s best to choose a portfolio with low or no price fluctuations, such as a money market fund (no shares). For long-term savings, remember to also optimise your potential tax benefits by first making use of your annual R30 000 allowance to invest in a tax-free savings account or unit trust. All income and capital gains from such an account is tax free. Once you’ve used that R30 000 annual allowance or the R500 000 lifetime allowance, you can start considering a traditional (taxable) unit trust.

Will you and your children be OK when future bills arrive?

Secondly, you would need to think about saving for your future living costs or other liabilities at a time when you may be earning no or insufficient income. The most common example would be saving for your retirement from formal employment. This is generally what is called ‘investing in your future self’ and there are several very tax-efficient ways to do this, such as contributing to your employer’s retirement fund monthly or making lump sum or monthly investments in your personal retirement annuity. All income and capital gains would be tax free, plus the contributions would also decrease your taxable income for the tax year in which you made the contributions. Putting money away for a child’s tertiary study and residency fees is another example of saving for a future liability, and opening a tax-free savings account in that child’s name is an option.

Have you insured your biggest asset?

Thirdly, before you invest the entire windfall, you also need to establish whether you have sufficient insurance. For professionals, even more so for young professionals, their biggest asset is not their properties or retirement fund, but their ability to earn an income over many decades, in other words their own intellectual property. Is that income-earning power insured with appropriate disability or income protection cover?

Is there something left to kick-start a smart start-up?

And lastly, you may want to consider something completely different from traditional investment products. Not as an alternative to investing for something aspirational or a big expense waiting for you in the future, but as a supplement to these investments. Just as your intellectual property is most likely your biggest asset, there are also entrepreneurs with significant intellectual property waiting to be unlocked with adequate funding from angel investors or venture capitalists. This type of investment normally carries significant risk and you sometimes need to leave your capital invested for a very long time before you see the type of return on equity that excites you. The upside potential of this option is tremendous if the entrepreneur can execute successfully on his or her business plan. But perhaps this is an area where you could also get involved in the business and offer your own expertise, which could ultimately be one of the most satisfying ways to invest.