Now is not the time to blow your windfall

This month some households will experience a financial boost with either a bonus or a tax-rebate. Many South Africans have become used to having bonuses and tax refunds as an expected additional income instead of an ‘unexpected extra’, and subsequently include it in their expenses. This year however one cannot afford to blow the windfall on a shopping spree as the economic conditions make it imperative to pay down debts and boost your savings.

With the outlook for both the local and global economy looking bleak, it is important to use your bonus as a buffer to ease your financial stress. Experts warn that if the Eurozone crisis is not resolved, the fallout will engulf the rest of the world and developing countries like South Africa are likely to be hard hit. If the global economy dips into another recession, jobs will be lost, working hours cut, and salary increases reduced drastically as companies’ profit margins get thinner and thinner. This also means that the unemployed may find it very hard to find employment soon.

Already many South Africans are experiencing financial strain due to adverse international and domestic economic conditions. According to the most recent Credit Bureau Monitor, the number of consumers with impaired records increased by 170 000 to 9.22 million in the second quarter of 2012. The report states that there were 19.60 million credit-active consumers as of end-June 2012, an increase of 0.6% from the previous quarter. Much of this can be attributed to spending money we have not yet earned yet and spent it on goods that we don’t need. South Africa’s savings’ rate remains low so people rely on credit to pay for emergency expenses.

Prem Govender, Chairperson of South African Savings Institute (SASI) warns consumers that they should plan their spending and not incur unnecessary debt to buy luxuries they cannot afford during this festive season. “While it is justifiable to be merry, we want to remind consumers that the short-lived joy over the season might not be worth the suffering they are likely to go through if they do not plan obligations awaiting in the New Year, especially at the beginning. Bonuses should be put to more productive use such as paying off debt or even start a retirement savings plan”, says Govender.

Jason Garner, Management Consultant at acsis, says South Africans lucky enough to receive tax refunds should look to immediately reinvest the money or use this as an opportunity to settle some debt, before the festive season spending spree starts. Consumers shouldn’t view a tax refund as a gift, but rather as a wealth creation opportunity. “Receiving a lump sum of cash is a great time to consider investing, as even the smallest of tax refunds can be put to good use if the correct investment is chosen,” says Garner.

He says that saving might not be as fun as shopping, but consumers should consider the fact that investing a tax refund of R5 000 on an annual basis and earning 12% on it annually could amount to R360 000 in 20 years. “This could mean retiring a few years earlier or treating yourself to a trip abroad, instead of wasting it on something small and insignificant.”

If you contribute to a retirement annuity it is important to remember that your tax rebate may well be a result of the tax benefit of your retirement contribution. If you spend this rebate you are effectively losing the opportunity to boost your retirement savings with before tax money. It is very important that you save the rebate and further boost your retirement savings.

How to spend your windfall wisely:

  • Put aside money for January’s additional expenses
  • Write down all your debt and pay off the lowest value debt with your bonus and close the account
  • Budget for any major expenses such as a major car service or replacing a faulty fridge
  • Pay your child’s annual school fees in advance and receive the discount
  • Pay a hospital plan or insurance policy upfront for a year.
  • Pay all outstanding service bills such as electricity and water.
  • Take advantage of your tax-free retirement savings and put 15% of your bonus into a retirement fund
  • Kick start your kids’ education plan

This article first appeared in City Press

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