Maximize Your Bonus: Tax Savings and Debt Repayment

The interest they pay on their car debt is prime plus one , I think prime plus 1.1 or something , it doesn't matter , prime plus one . And they're getting a bonus and the question for themselves is do they take that bonus and settle the debt ?

Do they take the bonus and invest it in the RA , or do they take the bonus and invest it elsewhere and then just keep going on the car repayments , the RA , and see what happens ? So let's just talk through your kind of choices and your avenues here because I think it is a great question , and maybe just explain the principles to get to an answer .

So for me , I think understanding that taking a portion of your bonus and putting it into your RA makes a lot of sense . Number one , because you reduce the tax that you're going to pay on your bonus . In effect , sars gives you a portion of that repayment into your RA as kind of a kickback on your taxes .

So I mean , we all need to pay tax , but we don't have to pay more than we want , right ? So if you can pay a bit less tax actually and build up your long-term retirement savings , that's a great idea . I have no problem with that . However , you need to compare that with what else you can do with the money .

Now , when I look at a debt on a car of prime plus one , currently prime is over 11% . So if you're paying prime plus one , you're paying more than 12% a year . Now when we look at the world of investments , it's impossible to find a five-year investment that guarantees you a tax-free return of 12% a year or more .

You can invest in the stock market and , as we know , the stock market . If you take a five-year view , it's very unlikely that you will lose money , but equally , it's not guaranteed that you will make 12% a year and certainly the growth that you make from the stock market , while it can be very good , it's not going to be tax-free .

Somewhere along the line one day you're going to pay , probably , capital gains tax . So , looking at your car debt , I look at it and say well , if I can pay extra money into my car debt , that means that I'm getting the equivalent of a return , a guaranteed return of 12 whatever percent tax-free , because you're actually saving the interest .

So that for me , is a guaranteed return . So I'm landing on the answer , and the answer is take the money , put it into your car , get that debt down as much as you possibly can . If you've got it paid off , that's even better .

If you're now in a position where you don't owe anything , then you take that monthly amount that you were earning or sorry , not that you were earning , but that you were paying into the car and you divide it . So you put a portion into your retirement fund . If you haven't maxed out your tax-free savings account , that's a no-brainer . Please do that .

Max out your tax-free savings and then you can keep adding to a kind of an exchange traded fund or a unit trust , something that will give you long-term capital growth . So I think that using the monthly repayment is key here .

If you take the bonus , you pay it off into your car debt and then you just take that monthly amount that you were paying into the car and just blow it , then you've wasted your time and our time recording the show for you . So please don't do that .

What you need to do is use that savings to kind of give yourself a leg up and that's for your future self and , I think , also just understanding now the next time you buy a car this is important you should not be in a position where you're financing a car at kind of 12 or 13% a year .

I mean , if you think about the way that money compounds , what that means is , if you've paid 200,000 Rand for the car , you're probably going to , over a five-year period , almost pay another 200,000 rand in interest . That's killer , that's wealth distraction . You cannot do that again .

So I think what you do is you start building up some money now that extra monthly amount that you've got from the car repayments . Put that into a unit trust and that's your car fund . So when the time comes for you to actually buy another car , obviously you're going to take a long time before you change cars , because now you've got a paid off car .

That's a valuable thing , right ? You don't just chop and change every three or five years because everyone else is doing it . You want to get to financial freedom , I'm assuming . So hold the car for as long as the car is safe to drive , it doesn't matter if the car costs you 20,000 Rand a year in services .

That's much cheaper than paying 5,000 Rand a month on a car repayment . So don't worry too much about that . Make sure the car is safe , make sure it's well serviced and then use a monthly amount to build up a lump sum that you can put down to buy a car in the future .

So when you trade in your current car , you use that trade-in value plus your top-up cash that you've been building and you pay for the car cash . That's the way to buy cars . When you've got to the position of a paid-off car , take your time , build up capital and buy the car's cash .

And don't listen to all the people that tell you that , yeah , there's a tax advantage , if you've got commission or whatever it is , you can get a salary structure All of that stuff's garbage . What's actually happening is you're paying the banks 13% a year to lend you money on something that's going to depreciate in value . Cars are not an investment .

They could be an income generator . I understand that , but other than that , they lose you money . And yes , you feel good when you buy the car , but after that you feel bad every single month when you're paying the blimmin' thing off . So don't do that . Build up that lump sum , you know . Get to the position where you buy your car's cash .

The only time it makes sense for me to finance a car and certainly I've done that in the past , I've spoken about it , you know , on the podcasts and on radio shows is when finance companies or car manufacturers are desperate to sell cars and they come to you and they say we'll sell you a car at prime minus five . I like that .

For me that's exciting because when interest rates are low let's say , the last time I did this , interest rates were about 7% and the car companies were in the middle of COVID , desperate to sell cars , so they were offering prime minus five . So that meant I was paying kind of just a bit less than 2% a year on interest .

I'm happy to pay 2% a year on interest and rather invest the balance of my money in capital growth . That should give me at least 10% a year , even if it's not guaranteed , even if I have to pay a bit of capital gains tax . So use the car companies to your advantage .

When they're desperate , that means they're offering you great deals , so don't pay up for the car . If they're offering you a good finance deal , you've still got to pay a low price for the car , but pay a good price . Finance the car very cheaply and that makes sense . Other than that , negotiate with cash .

Negotiate with the money you've got in your bank account when you're buying a car . Don't go and get a good finance deal and especially don't finance cars over six or seven years . Now , the interest costs are enormous and affordability is not what you're paying on a monthly basis .

It's what actually happens to your financial position over decades when you keep buying new cars . Keep making the financiers rich and the shareholders who kind of own those financiers . They love you . So people like me who buy indexed investments we love people who kind of borrow money . Why ?

Because our indexes own banks and banks make a lot of money out of people doing that . So what you need to do is be a shareholder , not a kind of a client of a financier . I hope that helps . Keep sending your questions . We really appreciate them and look forward to many more in the future .