Many companies are cash strapped due to the impact of Covid-19, but if you are one of the lucky few who got a bonus or windfall this year, it will be tempting to spend it to celebrate surviving another tough year.

However, money experts recommend being a bit cautious, warning that next year could be equally tough on our pockets, given the ongoing pandemic and increases in electricity costs and medical aid premiums.

So, what should you spend your bonus on? Here are six things you can do to reduce your debt obligations in 2022 and ensure you start the year off on a good note.

Pay off your car… maybe

The bank takes the bulk of your interest payment upfront in the early months and years of a car loan. If you’re still at the point in your loan’s term where you are paying the interest, your money could work harder elsewhere.

Kriben Reddy, TransUnion Africa vice president of auto information solutions, explains: “If you’re already three or four years into a 60- or 72-month loan, you’ll certainly be paying down capital, but you’ve already paid most of the interest. If it’s a new loan, any extra payment you make right now will save you a big chunk of interest down the road.

“If you’re in a position where you’re breaking even on what you owe on the car and what it’s worth, work out if you can afford your monthly payment. If you can, ask yourself: where’s the cash worth more right now? If the interest portion of your payment is minimal, compare what would happen if you put that cash into an interest-bearing account.

“Remember that a car is a depreciating asset, so even if you pay off the asset and save the instalment, your money will effectively be worth less at the end of the term. And if you use your bonus to pay off your car now, but change vehicles after a year, you’re not going to be in a better position. Think carefully.”

Before paying off your car, find out what it’s worth by getting a car value report from TransUnion or FirstCheck.

Pay your bond

You should always aim to pay over and above the required monthly instalment towards your home loan, advises Ernest Zamisa, financial adviser at Momentum, because ultimately this will help to reduce the interest that you pay, which in turn, reduces your monthly expenses.

If you have an access bond, you can always get hold of the money should you need it in the future, which will give you peace of mind.

Settle your short-term debt

Credit-card debt and personal loans usually carry the highest interest rates. If you receive a bonus, it is highly recommended that you settle these extremely punitive debts first.

Save money on monthly obligations

If you don’t have debts, you can use your bonus to save money on other financial obligations. Schools usually offer a 4% discount for paying the year’s fees up front instead of every term. This saving is currently better than an after tax-return from a money market investment.

DStv offers one free month if you pay upfront for a year – an effective discount of 8%. Find out if your insurance company offers a discount for paying your annual premium in full upfront.

Start/top up your emergency fund

It’s important to have an available sum of money to rely on if you run into difficulty, so that you’re not forced to take on short-term debt.

Zamisa says: “It is advisable for people to have between three- and six-months’ salary saved up as an emergency fund. A money market fund or savings account that has a decent interest rate and is easy to access would be a good vehicle for achieving this objective.”

Pay into your retirement pot

Many people wait until the end of the tax year in February to make their yearly retirement annuity payment.

Kerry Sutherland of Alexander Forbes says: “If you make this payment two months earlier every year, you will benefit from an extra two months of compound growth. The same is true for payments into your tax-free savings account.

“An added benefit for contributing to a retirement annuity is that the contributions are tax deductible, which means that you will be paying less income tax on your bonus.”

But what about treating yourself?

Studies show that treating yourself is good for your mental health.

“I definitely think people should spend on themselves to bring happiness and joy,” says Hayley Parry, money coach and facilitator at 1Life’s Truth About Money. “But the key is to do this responsibly so that you are not on the back foot financially come January.”

So how much of your bonus should you use to pay off debt, for savings, and for treats?  According to Sutherland, it’s a good idea to use the 50-30-20 rule:

• Use half of your bonus to pay down debt
• Dedicate 30% to savings
• Use 20% on treating yourself

This article first appeared in City Press.