In December, South Africans will generally see that a bonus has landed in their bank accounts.

If you are one of the fortunate ones, take a minute before you blow your bonus on gifts or festive shopping, according to Salem Nyati, Consumer Financial Education Specialist at the Momentum Group.

Nyati said: "Instead of spending your bonus frivolously, cleverly utilising this windfall can put you in a better financial position over time."

Jürgen Eckmann, Wealth Manager and Franchise Principal at Consult said that before you decide how to spend your bonus, you must have a well-maintained budget, an emergency fund, and a long-term savings strategy.

"Once these foundational elements are in place, consider how your bonus can move you closer to your financial goals," Eckmann said.

Both experts agree that your bonus can put you in a better financial position by using it to pay off debt or by investing it.

The experts have made a case for each choice, but ultimately the decision is yours.

Pay down debt

Nyati said that debt is money you have already spent but still owe to someone, with the lender charging you extra interest for borrowing it.

"If you don’t pay it off, the amount you owe keeps growing because interest gets added to the balance, and then you are charged even more interest on that, as well as debt servicing fees. Over time, it can spiral into a bigger and bigger problem, which is why paying off debt is the best investment," Nyati said.

"The aim is to be financially free, debt hinders you in achieving this goal, as it siphons off a significant portion of your income."

You must consider the interest rate when choosing between using your bonus to pay off debt or to invest, according to Nyati.

If the interest rate is high, it makes sense to pay down debt first. Overdrafts, personal loans and credit cards usually carry high interest rates with the average credit card interest rate for November 2024 sitting at 24.62% APR (annual percentage rate).

Another compelling reason is your credit score.

Nyati said: "A low credit score can make it harder to qualify for loans, like a bond or car financing, or result in higher interest rates if you do get approved. Beyond borrowing, your credit score can also influence your insurance premiums or even whether a landlord will rent to you. Paying off debt is important for protecting your credit score, which plays a key role in your financial future."

"You don’t own it if you still owe it. Tackle your high-interest debt first – especially if you have a lot of it – before you think about investing."

Invest it

Invest your bonus with the caveat that you already have a plan in place to repay your debt, particularly high-interest debt as this can severely hinder your wealth-earning potential, according to Eckmann.

"However, if the money you owe has a reasonable interest rate or is towards an asset – such as a bond (which you will likely be paying off over years to come) – this shouldn’t stop you from investing, particularly towards your long-term goals, like retirement," Eckmann said.

You can use your Christmas bonus to give your retirement savings a boost.

Eckmann said: "Let’s say you earn R50 000 a month and receive a 13th check of R50,000 in December. By contributing your entire bonus into a retirement annuity (RA), you unlock an array of benefits, starting with tax savings."

"If you’re in the 30% tax bracket, contributing R50,000 into an RA immediately reduces your taxable income, resulting in a potential tax refund of R15,500 from the South African Revenue Service (Sars). That’s a guaranteed return of 31% on your investment within a year, even before accounting for market growth. You could use the R15,500 to pay off debt, effectively achieving a dual benefit – growing your retirement savings while reducing your debt burden."

Eckmann said that funds in an RA grow tax-free, meaning no tax on interest, dividends, or capital gains, and assuming a conservative annual growth rate of 9%, your R50,000 bonus could grow into a lump sum of approximately R2.97 million by the time you retire.

"If converted into a retirement income, this could provide a monthly income of around R24,750 in today’s terms," Eckmann said.

Regardless of whether you choose paying off debt or investing, both experts agree that these options are good uses of your bonus, with the best choice for you being dependent on your circumstances.

Eckmann said: "If you are unsure, always consult an experienced, impartial professional like a financial adviser who will guide you in building and protecting your financial dream."

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Making the most of your December bonus: you can pay off debt or invest it