Personal-Finance

Should you use your bonus to pay your bills upfront?

2017-03-17 13:47

If you are one of the lucky few who can look forward to a bonus or some sort of windfall this year, you may want to hold back some of it to pay off your bigger liabilities.

While this may not sound like your idea of fun, the benefits of doing so could help you save more money in the future.

City Press looks at five things you can pay for upfront that will not only free up some money monthly, but will potentially give you a discount if you pay up in one go.

Save one month’s dstv subscription

The premium DStv package, for instance, sets you back R759 a month, which amounts to R9 108 a year. However, if you pay for your DStv upfront every year, you will only pay for 11 months (or R8 349), and if you pay before the annual increase in April, a call centre agent confirmed to City Press that you’d pay based on the previous year’s fee.

Discount on school fees

Not everyone can afford to do this, but if you get a bonus, you should consider paying for your child’s school fees upfront every year.

Gavin Came, a financial consultant at Sasfin and director of the Financial Intermediaries Association, warns that not all schools offer a discount, but adds: “When I was on a school council, we allowed parents to pay their school fees upfront and offered them a discount if they could.”

However, the discount varies – some schools offer as much as 10% off, while others offer about 6%.

Lower annual premium for short-term insurance

When it comes to your short-term insurance policies, premiums can be paid on an annual basis, regardless of whether you’re an individual or business customer.

Not all insurance companies offer you a discount, but it’s certainly worth finding out if yours does.

Not only could you get a discount on the premium, but on other things too.

Soul Abraham, head of commercial lines at Mutual & Federal, says: “From a personal policy point of view, the admin fee on an annual policy is less than monthly policies and, depending on the risk, there is a discount on the risk premium that annual policies are paying.

“Similarly, in the commercial space, there may be a discount for annual payment. When paying a policy in advance, customers can also benefit from lower banking admin costs because you would be making a once-off payment, as opposed to your bank account being debited monthly, so you would incur less banking fees.”

If you happen to want to change your insurer during the year, you would be entitled to a refund.

“The only downside is that, if you have a claim, for example after a car accident and the vehicle is written off, you are not entitled to a refund of the premium for the remainder of the year,” says Abraham.

Pay towards your future

Not all savings vehicles have the same benefits, but there are some, such as retirement annuities (RAs) and tax-free savings accounts (TFSAs), that would benefit you greatly if you took the time to fund them with some proper cash injections.

Using your bonus to top up your RA is a good idea because of the tax perks that come with it.

Contributions are tax deductible within limits, which means that money you would have paid to the SA Revenue Service can now grow in your RA instead.

Don’t forget – you’ll be saving more for your retirement too.

“While the money is in the fund, everything you earn is tax-free. The earlier you get the money into your RA, the better,” says Came.

Putting lump sums into your TFSA will also provide your money with protection from the taxman and, from this year, you can put even more away as the annual limit has increased from R30 000 to R33 000.

Pieter du Toit, CEO of FNB Investments, says: “TFSAs are tax-efficient savings vehicles that are exempt from taxes, including dividends tax, tax on interest and capital gains tax. The move by Finance Minister Pravin Gordhan shows that government continues to encourage long-term investing.

“If one were to invest R30 000 before March 1 and then top that up with R33 000 later in the week [in the new financial year], you could save yourself quite a lot of tax.”

Pay off your home loan faster

It may not be possible to pay off some major liabilities such as your car finance or home loan in one go, but if you put some lump sums into them, you’ll pay them off sooner and save on interest charges.

“On a home loan where you pay 11% a month, you could save 1% a month if you put in a lump sum early in the year,” says Came.

“Credit cards are exorbitant with their interest charges, so I would encourage people to always pay those off in full if they can.”

If you know you’re not good at making regular payments, paying upfront could be a surefire way to ensure you don’t struggle financially every month, while, at the same time, give you some money to keep in a savings account.

Then you could use the free capital you have every month to save even more or pay off other debts sooner.

So, think twice about what to do with your bonus. While it’s easy to spend it on that cruise to Mauritius, you could also use it to pay off your debts.

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March 19 2017