Use bonus to delete debt

Isaac Moledi

Isaac Moledi

The end of the year is associated with holidays, festivities, gifts and - for those who earn a salary - a bonus.

Use your bonus to buy financial freedom. With the recent interest rate rises, and more expected, the extra cash will help a great deal.

The first thing to do, said Old Mutual Bank's Paul Maggott, is pay off or reduce your debt.

By paying off a lump sum you can reduce the capital you owe and save on the interest.

Maggott said: "If you have short-term debt, such as shopping accounts or short-term loans, pay them off first because they generally attract higher interest rates."

He said it's worth distinguishing between types of debt. For example, a home loan enables you to buy an appreciating asset. Contrast this to buying designer jeans on credit. There is no financial benefit in jeans and the interest you'll pay is far more than the item is worth.

Try to save some of your bonus. The equivalent of a month's salary is considered a sufficient cushion for dealing with most of life's unexpected little problems.

Once you have sorted out your debt and have a little spare cash, you might want to think about longer-term financial wellbeing.

Though your bonus will be taxed, you can offset this by increasing your pension fund or retirement annuity contributions and benefit from the tax breaks.