How to spend your 13th cheque wisely

For many South African consumers, receiving their 13th cheque every December not only gives them a sense of joy and happiness, but also a sense of relief. It is a lifeline that their financial survival depends on.

How is the extra money being used?

The sad reality is, the majority of consumers don’t use their ‘extra salary’ intelligently. The typical 13th cheque gets spent on anything from extravagant TV screens to fancy holidays, most of which the consumer can’t really afford.

If your monthly expenses are under control and you can comfortably afford your debt each month, then perhaps you deserve to splurge over December. But with one in every two South African consumers having impaired credit records and being unable to meet their monthly debt repayments, the money could be more effectively spent.

What is a 13th Cheque?

If the employee's job contract stipulates that they will receive a 13th cheque on an annual basis, that cheque represents an annual bonus payment. An incentive known as a bonus, on the other hand, is one that depends on both the performance of the individual and the performance of the company. This distinction is typically laid forth in an employee's terms of employment in a very plain and concise manner.

Difference Between Performance Bonus and 13th Cheque

A thirteenth cheque is simply an extra monthly salary, or 8.33% of the employee's yearly wage, which is paid to the employee - typically in December or any other month depending on the employer's contract.

However, a performance bonus is determined by each employee's performance and is subject to the terms set forth in your employment contract by the company.

Ways to Use Your 13th Cheque Better

1. Don’t spend it before you receive it

Many consumers spend their ‘13th cheque’ by buying items on credit before they even receive their bonus. In tough financial times, businesses may cut back on expenses by omitting annual bonuses. If that happens, you'll have spent money that you really don't have and will never get back.

Don’t make this mistake. Wait until you have received your money before you decide what you are going to do with it.

2. Pay off your debt

In order to build a brighter financial future, you need to eradicate your debt. Use your 13th cheque to settle any outstanding bills or overdue debt repayments, such as medical bills, school fees or even your hefty outstanding credit card balance.

Prioritise your debt repayments by first paying off your most expensive accounts with the highest interest rates. Consumers who fail to meet their debt repayments quickly get caught in the debt spiral, as they will eventually begin to borrow 'from Peter to pay Paul’.

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Using your bonus to pay off your existing debt will help you avoid this. If you think your bonus won’t cover your outstanding balances, contact DebtBusters, South Africa’s top Debt Counsellor, for help.

3. Top up your savings account 

If you have struggled to keep up to date with your savings plan or if you have missed your savings goals throughout the year, use your bonus wisely and get your savings back on track.

Firstly, if you do not have a savings account, set up an emergency fund so that you are not caught by surprise and don't end up having to borrow money or short pay on accounts. Allocate a portion of your bonus into this emergency fund to get a head start.

If you allocate R5000 into your emergency fund you should get +- 6% return on your investment in a year. Going forward, your monthly contribution to an emergency savings fund will fall under the expenses section of your budget.

If you do not have any debt to pay off and already have an emergency fund, look at boosting your retirement annuity or unit trust by adding in a monetary contribution.

4. Plan for the expenses of January 

Once your overdue debts or payments are up to date or even settled, factor new expenses into next year’s budget and allocate a portion of your 13th cheque towards those expenses. Car services, university or school fees, increased petrol prices and inflated grocery prices can increase your monthly monetary requirements.

Plan for the new year by creating a budget that allows for these expenses and use your bonus to supplement these expenses if need be.

5. Invest the money 

You should think about topping off your retirement account or tax-free investment (TFSA) account. You may contribute up to 27.5% of your pre-tax income or compensation per year to your retirement fund (capped at R350,000 a year). You can also deposit R33,000 of your post-tax income each year (up to a lifetime maximum of R500,000) into a TFSA account; dividends, interest income, and capital gains are tax-free.

Both provide tempting tax-free methods for growing your money. It is advisable to utilize these tax-free saving opportunities on an annual basis since if you don't act, you lose the allowance.

6. Pay off or lower loans

A significant portion of homeowners have bonds. Only 25% of people try to pay it off more quickly, while the vast majority only make the minimum payment necessary. Keep in mind that when you first take out a bond, a larger portion is allocated to paying interest and only a tiny percentage is allocated to making capital repayments.

You can lower your interest payments and shorten the loan's repayment period by paying off your mortgage early on. If you have an access bond, you may always withdraw the money again in case of an emergency and won't have to worry that it will be permanently hidden.

Remember; your 13th cheque is tax deductible and keep in mind that you may not be receiving a full monthly salary.

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