What should you do with a financial windfall?
At some point in our lives, we’ve all thought about what we should do with a financial windfall. It’s usually around winning the lotto, or perhaps investing into the next SnapChat. 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 windfalls may be:
- A redundancy payout
- An inheritance
- Selling off part of your business
- 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 windfall have spent 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 unless it’s a matter of life and death, you can afford to wait while you consider your options. It may take you some to time out what you want to do, so consider putting it in a high-interest account or a term deposit. Avoiding a rushed decision allows you to gain a greater understanding of the impact this money can make.
Give in to your temptations, but only a little. If your windfall is substantial, do something nice for yourself but don’t get carried away. For example, on $1,000,000, consider a short trip away for $10,000, but don’t go out and buy a $100,000 car. The best way to consider how much to allow yourself to spend is to think about how much income you would 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 unlikely that you’ll be able to earn it back.
Consider paying off debts
For many people, debt can be a constant drag. A windfall can fix this, but it’s important to be careful here. Sometimes, if you’ve maxed out credit cards and personal loans, you’re in a position where you can’t borrow any more. Further, while you’re paying off those 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 more than earn. Get your budget under control before you pay off debt, and then you can use any extra cash to start building assets.
Just because you have a bit 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 they 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.