Bonus time!

2014: A tough year for Short Term
December 2, 2014
If you are a parent, the December holidays can seem extraordinarily long!
December 2, 2014

A2blIf you find yourself in the enviable position of receiving a bonus within the coming months, you may want to take a moment to decide how best to spend that extra cash.

All too often when the New Year comes around, our bonuses have been spent on luxuries that provide no real long-term value.

Instead, why not consider ridding yourself of some short-term debt?

Let’s take a very common scenario where an individual is paying the minimum monthly instalment to a credit card with a loan balance of R50,000, a term of 24 months, and an interest rate of 36% p.a. Here’s what the payment plan will look like:

Loan Summary
Scheduled Payment R 2,952.37
Scheduled Number of Payments 24
Actual Number of Payments 24
Total Early Payments R 0.00
Total Interest R 20,856.90

If we assume that a bonus of R15,000 is paid into the credit card, the payment plan changes as follows:

Loan Summary
Scheduled Payment R 2,952.37
Scheduled Number of Payments 24
Actual Number of Payments 16
Total Early Payments R 15,000.00
Total Interest R 9,593.16

The saving in interest payments alone is R11,264 with eight months of payments freed up. Not to mention the “mini bonus” of additional cash in your pocket each month. The difference is remarkable!

If you don’t have any significant short-term debt, an alternative for your bonus may be to start an emergency savings account. With emergency savings at your disposal you avoid the danger of building up more short-term debt and interest payments.

Financial advisors generally suggest that you should aim to have at least three months’ worth of disposable income saved in a relatively liquid account.

Emergency funds could provide for any of the following unexpected and non-budgeted items:

  • Loss of income
  • Medical costs
  • Veterinary bills
  • Motor vehicle repairs
  • Repairs to property
  • Travel costs

If you don’t yet have an emergency fund, save as much as you can and gradually build the capital. Once your capital exceeds the three-month provision then you can skim off the top for a longer-term investment.

You’ll be amazed at how every little bit helps – bear this in mind before you’re tempted to buy those unnecessary, spur-of-the-moment items!

sean

Sean Fahy
Investment Advisor
sean@fpm.co.za
0861 111 376

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

 

SRA
SRA