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Financial Health: Spend your 13th cheque wisely

Tempting as it may seem to let an annual bonus slip slowly – or quickly in some cases – through your fingers on a big-screen television or exotic family vacation, it’s far wiser to pay off long-term debt, such as your home loan or your car.

“A 13th cheque can help decrease a home owner’s debt burden, especially during a time when interest rates and monthly repayments are on the rise,” says Bradd Bendall, Head of Sales of ooba, South Africa’s largest bond originator. “While it may be very tempting to spend the extra income right away, now more than ever one should take a step back and evaluate long term financial goals first. And paying off debt should be a priority. Rising debt levels, if left unchecked, will not help consumers in the long-term.”

More so, he says, now is not the time to be spending frivolously. The low savings rate of South Africans, coupled with warnings regarding a rising interest rate cycle, means that consumers need all the help they can get to first pay off debts before indulging.

Currently South Africa’s household savings rate is sitting at a lowly 1.7%, with the South African government warning consumers to cut back on spending as the country’s total debt reaches nearly 50%, a level the government considers unsustainable.

That does not mean that you shouldn’t enjoy some of your hard earned money. “It does not have to be the entire bonus received,” says Bendall. “Even a small portion of an additional income like a 13th cheque towards a home loan can make an enormous difference over time.”

He uses the example of a home owner paying off a bond of R500 000 with an interest rate of 9% over 20 years, getting a bonus of R17 000 after tax.

"Paying half of the bonus, i.e. R8 500, into the bond could reduce the term of the loan by up to ten months, equivalent to a saving of roughly R45,000 in instalments.”

Bendall gives the following tips to invest your end-of-year bonus into a home loan:

- Keep the long-term benefits in mind. By paying off one’s home loan over a shorter period of time, great savings can be achieved that can allow one to realise dreams over the long term.

- Don’t be tempted by the season of merriment. Spending excessively on gifts, food and other festive season items may be tempting, but will not reap any financial benefits in the future. A long-term benefit is the additional income you will have for your household once the debt is paid off.
 
- Potential home owners should put a portion of their added income towards a deposit, as banks are then far more willing to offer a competitive interest rate.
 
- If you are not sure how to save your annual bonus, prioritise your saving by choosing to pay the debt with the highest interest rate first. In most cases, this will be your credit card or your home loan.
 
- Keep a small amount of your bonus for spending. You will be more motivated to save if you can see the results of your hard work and enjoy it by rewarding yourself.


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