Use that bonus wisely

THE holiday season is on our doorstep and shopping sprees will soon start in earnest - aided by year-end bonuses.

But injecting an annual bonus into a "collapsing" bank account can only give an illusion of wealth - and holiday spending will get out of control if you don't plan properly.

Carl Fischer, executive of marketing and corporate affairs at Capitec Bank, says while it's important to reward yourself for a year of hard work, too many people blow their bonuses on entertainment and pricey gifts - a sure-fire way of suffering from a financial hangover before the festive season has ended.

"While the temptation of blowing it all on Christmas specials is attractive, especially if you've had to cut back on luxuries to cut costs, doing so could land you in financial hot water," Fischer says.

He advises careful spending and clever investing, particularly since the recession's grip isn't expected to ease any time soon.

Fischer suggests that readers consider the following six smart tips to put that extra cash to good use:

l Plan ahead. Before you start dreaming about hitting the shops, revisit your financial goals: saving a little every month, settling debts and staying focused.

"If you have a lot of debts to settle deciding what to pay off first might be one of your biggest responsibilities," Fischer says.

It's also important to keep annual payments such as car licences and unexpected expenses in mind.

lReduce debt now.

If possible, use your annual bonus to pay off all your high-interest debt in one go.

"This kills two birds with one stone: you'll settle your debt and avoid incurring any future interest.

But if you don't want to use all of it at once, paying off just R50 to R100 more than the minimum repayment each month will help you pay off the debt quicker and will save interest in the long run."

lKick-start your savings.

"Whether you're saving for an overseas trip or planning for your child's education, you should have at least three months of income saved up somewhere."

l Squash that mortgage

If you don't have any personal debts think about your mortgage.

"If interest on your mortgage is calculated daily, invest the extra money.

"If it's an annual interest mortgage, find out when the interest is deducted from your mortgage, put the cash in a savings account until that date and then pay it off.

"You could take years off your mortgage if you're willing to invest now, which will free you up later in life."

l Invest a lump sum.

"Consider investing your bonus so it grows - instead of buying goods that will depreciate and lose their value, fast," Fischer suggests.

Start by visiting your bank and asking about their investment products.

A standard savings account will earn interest and compound interest which, over time, could leave you with a tidy sum.

Fischer advises that the interest rate can vary a lot between banks.

l Line up your pension and pay less tax.

Most people fall under the category of an allowed tax deduction on RA payments for 15percent of your non-retirement funding income, which is the part of your salary that does not go towards your RA or pension fund.

If your employer excludes your annual bonus when calculating contributions to your pension fund, you can claim a tax deduction of 15percent of any portion of your bonus that you contribute to an RA. You might not see the immediate benefit but it will pay off in the long term.

At the end of the day, while having an "unexpected" sum of money might cause plenty of retail therapy, it is best to consider all your options carefully, Fischer says.