Bonus time: Pay Off Debt, Invest, or Spend?

The end of the year often brings a much-anticipated financial boost: your bonus. For many, the temptation to spend it on a luxe holiday, the latest gadget, or a wardrobe refresh is hard to resist.

While rewarding yourself isn’t a bad thing, considering how to make your bonus work for you in the long run can be far more rewarding. Before you swipe your card, let’s explore why investing your bonus might be a smarter move and what your options are.

The Real Value of Your Bonus

A bonus isn’t just extra money - it’s an opportunity to improve your financial future. Spending your bonus on short-term pleasures may bring instant gratification, but investing it can set you up for long-term success. Whether it’s paying off debt, building wealth, or ensuring financial security, how you use your bonus can make a world of difference.

Let’s break it down: Should you pay off debt, invest, or spend your bonus?

Option 1: Pay Off Debt

Debt, especially high-interest debt like credit cards or personal loans, can weigh heavily on your finances. If a significant portion of your income goes toward servicing debt, paying it off should be your top priority. Why?

• Save on interest: By paying off debt early, you avoid paying high-interest fees over time.
• Reduce financial stress: Living debt-free brings peace of mind and greater financial flexibility.
• Free up cash flow: Once your debt is paid off, you can allocate those monthly payments toward savings or investments.

When to prioritize this option: If you have debt with interest rates higher than 10%, it’s often better to clear that first. You might want to consider consolidating your debt with an EasyCredit loan. EasyCredit allows you to borrow money against your EasyEquities portfolio and offers loans up to R300 000 at an interest rate of prime +3% and a once off 1% initiation fee on your loan value.

This offers you an opportunity to pay down high-interest credit card debt and save thousands on interest every year.

Option 2: Invest Your Bonus

Investing allows you to grow your wealth and put your bonus to work for you. By investing, you can benefit from compound growth, meaning your money earns interest or returns, and those returns start earning as well. The earlier you start, the bigger the impact.

Here are some options to invest your bonus:

1. Stocks or ETFs: Choose local or international stocks; or exchange-traded funds (ETFs) or Actively Managed ETFs that suit your risk appetite. Historically, the stock market has consistently delivered higher returns compared to savings accounts.
2. Retirement Funds: Contributing to your retirement annuity or Tax Free Savings Account ensures a tax-efficient investment while securing your future.
3. Emergency Fund: If you don’t already have one, allocate some of your bonus to build an emergency fund (3-6 months of expenses). This acts as a safety net for unexpected events.
4. Unit Trusts, Property or Bonds: For a more balanced approach, consider bonds, property or unit trusts that combine fixed income and growth.

Why investing: Unlike spending, investing gives you the potential to grow your wealth exponentially. Even small amounts invested consistently can add up to significant gains over time.

Option 3: Spend It

Spending your bonus isn’t inherently bad. You work hard for your money, and it’s important to enjoy it. The key is to spend intentionally and within limits.

• Treat yourself wisely: Instead of spending the entire bonus on splurges, set aside a small portion (10-20%) for something you truly enjoy.
• Invest in experiences: Holidays, learning new skills, or taking courses can bring lasting value and personal growth.

However, if you spend the majority of your bonus without a plan, you risk missing out on opportunities to improve your financial situation.

So, What’s the Best Option?

The best choice depends on your financial circumstances. Here’s a guide:

1. Pay off debt first: If you have high-interest debt, clear it. The money you save on interest is like an immediate return on investment.
2. Invest next: Once you have more manageable low-interest debt, focus on growing your wealth through investments.
3. Spend a little: Life is about balance. Allocate a small percentage of your bonus for enjoyment or personal development.

Investing your bonus rather than spending it impulsively can have a lasting impact on your financial future. Whether you choose to pay off debt, invest in the market, or allocate it toward retirement, making intentional decisions ensures your hard-earned bonus works for you. By balancing financial priorities, you’ll set yourself up for a healthier and more secure financial future - one that far outweighs any short-term pleasure.

So, as your bonus arrives, take a step back, evaluate your goals, and make a choice that your future self will thank you for.