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Holiday for the futureAnnual bonuses for employees may not be all that common this year against the backdrop of the recession. Those who are lucky enough to receive a bonus, should this year perhaps think twice about how and for what they utilise the extra cash in their pockets. It has been a difficult year, and using extra money to go on a shopping spree is tempting. Rob Formby, director of retail operations at Allan Gray suggests, however, that instead of splurging, one should rather consider investing as much as possible of the bonus.
“Annual bonuses recognise a year of hard work, and given that there may only be 20 to 30 of these annual payouts in your working life, employees should reward themselves with long-term financial stability instead of short-term purchases,” he says.
The key is to plan for an annual bonus, deciding in advance how much will be spent and how much invested.
Formby says when making financial decisions, the first step is to know where you are currently and then compare this to where you want to be in the future.
“Acknowledging your financial needs and making concrete plans to meet these is a discipline that will benefit you, and your family, enormously in the future. It is the most empowering, valuable gift you can give yourself.”
Parents, for example, should consider investing in their children’s future by saving for their education. But instead of simply putting aside money in a bank account, he urges them to invest in unit trusts that provide access to the superior returns of the stock market, particularly over the longer term.
“Over the long term, the risk of inflation eroding one’s buying power is much greater than the risk of volatility of the markets, which tends to be short term,” he says.
Comparing an investment in the stock market to a bank account shows the potentially staggering difference in returns.
Saving R100 per month in a bank account for 35 years from the end of September 1974 until the end of September 2009, and assuming a money market return over the period of 13.05% per annum, your money would have grown to R325 857 after tax, calculated at a rate of 25%.
In comparison, if you had invested R100 a month on the stock market over the same period and received the return of the FTSE/JSE All Share Index (including dividends), your money would have grown to R3 551 396.
“By investing in a variety of listed companies on behalf of unit holders, unit trusts spread investment risk. In terms of fees, they are a cost-effective and transparent way of investing where investment professionals manage your investment returns," says Formby.
"In addition, there is also a range of different funds available to suit different investors’ financial needs and risk profiles.”
In conclusion, Formby says that while it is tempting to focus on the short-term gratification and avoid long-term decisions, investors should use their annual bonus to, firstly, reduce debt; and then, secondly, invest for future needs such as education and retirement.
“Extravagant possessions won’t help when you’ve reached retirement and haven’t amassed enough funds to support yourself,” he concludes.
