There comes a time in your life when you are lucky enough to receive some extra money in addition to your monthly salary, whether it be a tax refund, an inheritance, winning the lottery or from a sporting achievement such as some of the South African Olympic athletes who are taking home an impressive R400 000 each for winning a gold medal. While winning this additional sum of money is a reward on its own, how you choose to spend this money will result in the real benefits.
According to Jason Garner, management consultant at acsis, in order to maximise the benefit of receiving extra money, it is advisable to spend some time and plan how best to allocate the money before immediately spending it on impulse.
"It is important to view the sum of money as a wealth creation opportunity rather than just an opportunity to spoil yourself and splash out, as this will provide no long-term benefit.
"Instead pay yourself first by investing towards your goals, or to settle debt, then allocate what is left to spoil yourself."
Garner adds it is crucial to reinvest the money where it will provide the greatest financial return.
"This will vary depending on your financial plans and goals and by the amount that is available for investing.
"In order to use this additional money to assist with securing long-term financial rewards and security, it is important to think long-term, rather than short-term, no matter how big or small the sum of money is.
"With interest rates at an all-time low, the interest generated on savings is also considerably lower. This means that if you received a smaller sum of money, such as R10 000, you will benefit more by paying off a debt with a high interest rate, such as a credit card overdraft."
Garner provides an example on how to plan accordingly before allocating your money.
"If you invest R10 000 into a savings account, with an interest rate of five percent per year, you would have earned approximately R500 in interest after one year.
"If you had rather paid R10 000 into your credit card bill that has an interest rate of 16 percent, you would have saved yourself R1600 in interest. This ultimately means that by not paying off your debt with the highest interest rate, you have spent an extra R1100 during the year which could have been avoided with prior planning. If you then took the R1100 interest savings and used this to pay off further debt, or alternatively committed this additional saving into an investment strategy, suddenly you find yourself in a significantly better financial position.
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