We’ve all thought about what we’d do with a financial windfall. It’s usually around winning the lotto, or perhaps investing into the next Netflix. But a financial windfall is really any amount of money that you receive that isn’t part of your normal day to day budget. Examples of financial windfalls may be a redundancy payout, an inheritance, selling off part of your business or divesting of any asset that’s grown substantially in value.
With careful planning, a lump sum of money can really make a difference to both your day to day life as well as your future. However, research shows that 70 percent of people that receive a financial windfall spend it all within three years of receiving it. Here are the important things you need to consider so that you can make the most of the opportunity.
You didn’t have it before, so you can afford to wait while you consider your options. Avoiding a rushed decision allows you to gain a greater understanding of the impact this money can make in your life. It may take you some to time to work out what you want to do, so consider putting the funds in a high-interest account or a term deposit so you can earn interest in the meantime.
If your windfall is substantial, do something nice for yourself but don’t get carried away. For example, if you receive a windfall of $1,000,000, you could consider spending $10,000 on a holiday. But it wouldn’t be wise to rush out and buy a $100,000 car.
The best way to consider how much to allow yourself to spend is to think about the income you could earn from the windfall in the first 3-6 months. In this scenario, at 3% interest, you would earn $10,000 after four months. The chances of you being able to earn that money back is quite high. But if you spend 10% or 20% of your windfall, it’s less likely that you’ll be able to earn it back.
Reconsider paying off debts
For many people, debt creates considerable stress and can really impact your health, relationships and general wellbeing. A financial windfall can fix all this, but it’s important to be careful here.
While you’re paying off your debts, you’re learning how to spend a lot less. If you pay your debt off before you can get your spending habits under control, it’s more than likely that you’ll go back to spending beyond your means. So get your budget under control before you pay off debt. Then you can use any extra cash to start building assets.
Just because you have come into a significant sum of money, don’t forget the basic rules of investment. Many heirs to great fortunes have lost it all because of unwise investments. If you’re chasing higher returns, you’re going to encounter higher risks.
Consider what you want to achieve and then explore ways in which your windfall could support this. It could be as simple as buying an investment property or two, buying some shares or even topping up your superannuation. While these options don’t sound anywhere near as exciting as investing in the next Facebook or Amazon, you’re more likely to still have your money in 10 years time.
While hard to believe, 70 per cent of people who receive a financial windfall spend it all within three years. Research suggests that if you haven’t earned the money yourself, you may not fully appreciate it’s value, leading to it being squandered.
Like windfalls, it is also unfortunate to see many who receive an inheritance squander this wealth within a few years. Making it worse, an inheritance is often a personal bequest from a loved one who has worked hard to make this opportunity available to you.
There is a lot to consider. Can you spend it? Should you invest it? What about paying down debt? Do you need to pay tax on it? These questions and others need to be carefully considered. Guidance from a financial adviser may allow you to enjoy the benefits both now and for the rest of your life.
For more comprehensive information on what to do with a financial windfall, you could also check out our ebook Financial planning for inheritance and windfalls.