MONEY CLINIC | How can I get the most out of my 13th cheque?

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If you're fortunate enough to get a 13th cheque in a challenging economic climate, you're probably already planning how to spend it. But before you embark on a wild shopping spree, consider this an excellent opportunity to take a step closer to financial freedom.

In a tough economic environment, with inflation and food prices rising fast, your most sensible course of action is to save most of your bonus, says Andrew Smythe, a senior financial advisor at NMG.  

"With inflation and food prices rising fast, your most sensible course of action is to save most of your bonus," says Smythe.

Smythe shares his top five ideas on how you can use your 13th cheque to its best effect:

Pay off debt

If you're looking to reduce your debt burden, there are two approaches you can take: avalanche or snowball. With the avalanche method, you make minimum payments on all your debts and then use any additional funds to pay off the debt with the highest interest rate. With the snowball method, you make minimum payments on all debt, then pay off the smallest debts before moving on to the bigger ones. The avalanche method means you pay less interest over time, but both will eventually set you free from debt if you stay committed.

Pay extra into your home loan

If you pay a lump sum into your home loan every December, you'll cut years off your home loan term – and pay tens of thousands of rands less in interest in the process. At the current interest rates on a home loan, any additional money into your home loan means you're paying off your debt far faster than you would if you were saving the money in a savings account.

Start an emergency savings account 

If there is one thing that Covid-19 taught us, it's that everyone should have an emergency fund. Most financial advisors suggest you build up between three to six months of your net salary in reserve. "A money market account is a good savings vehicle for emergency savings. The longer the notice period you choose, the better the interest rate you'll get – and it will ensure you can't use the money for other things," said Smythe.

Invest in the long-term value of your home

Smart investments in your home don’t only make it a better place to live, but can also add to the market value. But be careful: R150 000 spent on alterations doesn’t necessarily translate to a direct R150 000 increase in your house's value. Your best areas to increase your home’s value include:

• Increasing the functional space
• Upgrading your entertainment areas
• Installing a swimming pool
• Upgrading your security system

Before you start with any alterations, do your homework. Check what the house market is doing in your area, what other houses in your area look like, and what you’ll get if you put your house on the market now. If you over-capitalise, you’ll never get your money back.

Pay school fees upfront 

Many schools offer sizable discounts to parents who pay for the next year’s fees upfront. By paying all, or part, of the school fees this year, you free up extra cash in your monthly budget next year, either for unexpected expenses like car repairs or medical bills, or emergency savings, said Smythe. 

Questions may be edited for brevity and clarity.