Following recent global economic instability, the delayed improvement in economic growth is causing concerns and pressure on South African businesses. With many companies becoming focused on making at least small margins, and avoiding downsizing or worse, the idea of the 13th cheque (or annual bonus) is carefully being analysed.
An increasing number of companies are adopting a system of performance-based bonuses, vs. the traditional annual bonus or 13th cheque. According to wealth expert Stuart Kantor of independent financial advisor firm Kanan Wealth: "As far as the current economic climate is concerned, employers are feeling the pressure to meet what has become a crude employee expectation, and there is no doubt that the 2008 market and economic crash has caused a shift in business thinking. I continue to foresee a paradigm split as businesses move into the future. A split because business owners should not ignore loyalty and performance - and so some business owners will reward staff even at their own short-term expense. Then there will always be the more short-sighted business owner who clamps down at the expense of staff morale and starts the New Year on the back foot."
The absence of annual bonuses often results in financial distress for consumers, as they are less likely to attempt to reduce debt systematically over the year as they await their annual bonus, which in many instances does not arrive. "Many employees have a warped perception of entitlement and may find themselves in real trouble if their bonus does not arrive."
"The reality is that real economic growth is sluggish and some sectors are thriving while critical ones, such as US housing, are lagging. Governments around the world are doing all they can to stimulate the economy and this has meant that, once again, consumers who may not afford debt at average rates may feel a false sense of security in the current rate environment. Importantly, consumers must know that everything goes in cycles and, when budgeting, try to imagine your affordability in a world where rates are 2% to 4% higher. Remember, though, do not rely on the delivery of an annual bonus."
However, with the Festive Season around the corner, whether you do receive a performance-based bonus or the traditional 13th cheque, what are the best practices to make sure these funds are used most effectively, and not injected into a festive season splurge?
Consumers need to be wary of falling into the spending trap during the Festive Season, and beginning the year in further debt says Kantor. "Any annual bonus awarded needs to be carefully thought about in terms of how it is spent. These bonuses can throw consumers the very lifeline they need to realign their level of debt so that they can begin the following year looking at growth, as opposed to an increased level of debt as a result of the Festive Season spending magnet than attracts us all."
Where to start? ''Begin with your highest interest-bearing debt, such as credit cards or store credit. These are the killers, and what you usually buy on store credit ends up costing you double by the time you pay it back. At the end of the day, when someone offers you credit they are, in fact, offering you future debt. The best use of credit is only if you are buying an asset or product which grows in value or will add leverage to your goals. South Africans are far too eager to add to already existing debt, with no real future planning as to how they will settle this debt. This trend has caused major issues in the past, not only for the consumer but for the entire South African economy, and will continue to do so until addressed properly.
"Start by allocating at least 40% of your bonus toward debt. Think of your bonus as a return on investment. If you are fortunate enough to get a 13th cheque on, for example, a salary of R10 000 per month, then the bonus equates to an annualised return of 8%. If you then take the return and pay off debt, you begin the journey toward compound investment returns by first removing the negative spiral of compound debt. On a more direct or simplistic note, use your bonus to get your 2014 resolutions off to a good start."
What pitfalls should consumers be wary of? "The pitfalls are easy to identify and can be summarised as follows: Most consumers are victims of a world filled with peer pressure and status anxiety and so we first take on debt so that we can have what ours peers have. Furthermore, nobody talks about money on a real peer-to-peer level, such as at a braai or over a work-time lunch break and so few people tend to face the uncomfortable and unsexy reality that a credit card is not the gift that keeps on giving. In fact, on a technical and important level, consumers must understand the following: increasing your debt means increasing your near-future expenses, which means that you'd better be sure you will earn more and be more productive in the near future too."
Kantor advises consumers to adopt the following patterns:
