3 ways to use your year-end bonus to get ahead in 2023
Blessing Utete, Managing Executive at Old Mutual Corporate
Debt is a problem and, on top of that, high costs for fuel, food, home loans and many other elements are leaving South Africans with little or no extra money, so it’s imperative that those who are fortunate enough to receive a year-end bonus from their employers, use these funds to improve their financial position and retirement savings, instead of blowing it all on festive season fun.
This is according to Blessing Utete, Managing Executive at Old Mutual Corporate, who says that the recent 75 basis point interest rate hike that pushed rates to their highest level since 2016, is a warning to South Africans to prioritise better personal financial management to ensure peace of mind for now and at retirement.
“Costs are eating into all of our budgets – it’s a hold up at the petrol pump every time we refill, food inflation is in double digits, home loan repayments on a new R2-million bond are up by more than R4000 a month since the start of 2022 and Eskom has proposed a tariff increase of 32%,” said Utete.
“It’s tough for everybody, but times like these are a reminder to be more financially savvy. People who had little or no debt and, even better, those with some savings are navigating these tough conditions much better than those who came into 2022 with piles of debt and a zero on their savings and retirement account statements.”
Utete said the sudden emergence of Covid-19 showed that crises can arise unexpectedly, and preparation and planning of finances are vital to ensure peace of mind during such times.
Even if you were battered by 2022, your bonus could be a great opportunity to set yourself up for becoming more financially savvy and resilient to shocks in 2023. Consider starting this journey by taking any of these three steps:
1. Savings first
A good place to start is to save all or a portion of your bonus either in a savings account for emergencies or an investment. Emergency funds are an excellent way to pay for unanticipated expenses like a car repair, a new appliance, or a trip to the dentist. This way, there is no need to access debt in emergencies.
“Saving just a small portion is better than blowing it all on festive season feasting and spoils. Creating good habits means taking the first step but then following that up with another step and another until you’re walking the path of a financially savvy person,” says Utete. “Then, the next time the path gets slippery, and a few potholes appear, you’ll be equipped to manage it while others about you are losing their footing.”
2. Pay off debt
With some estimates indicating that South Africans spend up to 75% of their income on servicing credit, Utete says the year-end bonus could be used to cut down personal debt. He says it starts with individuals and households taking stock of their current debt situation.
“Once you know exactly how much you owe, you can take steps to rid yourself of especially high interest debt. Your debt plan should make sure you are up to date on utilities; rent and bond payments. Your year-end bonus provides you with just the motivation and the means you need to start chipping away at your debt situation by settling even one of your loans or credit cards. This is a wonderful way to go into the new year. It’s important then not to take on any new debt once you’ve paid off the current debt,” he said.
3. Invest towards retirement
For those looking beyond 2023, investing their bonus into retirement savings instead of spending it all on holiday fun holds substantial benefits for their retirement outcomes.
He points out that the average employee requires nine to ten times their annual salary to retire comfortably. The Old Mutual SA Retirement Gauge 2022, an in-depth look at the retirement savings habits and retirement readiness of South Africans belonging to umbrella funds through their employers’ occupational schemes, revealed that only a small portion of South African employees are managing to win the retirement savings battle by making the right investment decisions.
“Think of investing your bonus as delayed gratification or a future gift to yourself. While most South Africans do not have enough retirement savings, by investing cash windfalls, more of us could avoid the retirement savings shortfall,” says Utete.
“The Old Mutual SuperFund, for example, allows for individual lumpsum contributions, so employees can top-up their retirement savings contributions if they wish to do so, broadly speaking, even if you’re saving in a group retirement plan. If employees want to top-up their group retirement savings or employee umbrella fund, they should inquire about it with their employer or payroll administrator.”
Utete says it’s important that employees plan and prioritize their spending to get the most out of their money and that employers should remind their employees of the option to save some of the bonus into their retirement savings.
“We know that many people continue to make common mistakes when they receive a lump sum of money, and yet, by simply implementing good personal financial habits, they can be well on their way to self-reliance. Let 2023 be the year of sound personal financial management,” he concluded.