What to do with a windfall
One day you may have the good fortune to come into an unexpected cash windfall. Perhaps an inheritance, lottery win, redundancy payout or an unfortunate compensation or insurance claim.
Whatever the reason, it makes sense to be careful about how you deal with it in order to make the most of it. The first instinct may be to buy that car, boat or holiday you’ve had your eye on - and for some, that could be a suitable choice. Others may feel the need to invest it for a rainy day, or use it to pay down debt or put into super. There are so many choices, so how do you make the right one?
Firstly, avoid rushing into a decision. You need clarity and objectivity before taking action.
Things like your age, income, investment situation, family needs, debt status and personal goals are all issues that will influence the best decision for you. Taxation will invariably be a major consideration too, in terms of minimising tax liabilities that may apply to the lump sum, or using the funds to improve your tax position in other areas of your finances.
Redundancy payments in particular can be complex in their make-up and taxation treatment. Making poorly informed decisions on a redundancy payout may mean you end up paying more tax than you need to.
For example, there may be opportunities to delay some of your payout to the next financial year. This may allow you to take advantage of any increases in tax free thresholds that apply to your payout or help reduce your taxable income for the current year and thereby reduce the amount of tax payable. There may also be opportunities to minimise tax by placing some of your payout into super.
All of these issues mean that it may be wise to get some professional financial and taxation advice as early as possible to make the most of opportunities and to alleviate worry at what can be a stressful time.
Spend, invest or pay off debt?
In general terms, the choices available for a windfall can be divided into spend, invest or pay off debt. It will likely be a combination of two or three of them, but will vary from person to person.
From a strictly financial point of view, there can be a good argument for paying off debt as a priority, especially if you have a sizable proportion of debt at high interest. Having said that, there may be opportunities investment-wise that you are foregoing if you apply all the funds toward debt. It is dangerous to generalise, so it may be prudent to seek advice on your personal situation and have a proper analysis and projections done by a qualified financial planner.
Overlaid onto any decision about “spend, invest, or pay off debt” is the fact that every person has different lifestyle priorities. For example, you may have health concerns that skew you toward using some of the funds for lifestyle improvement in the short term rather than putting it all away for a rainy day. Such priority decisions are perfectly valid and a financial planner can help you weigh up the pros and cons.
How will it affect your legacy?
Another consideration for those of us getting on in years is how a sudden surge of funds from a windfall may affect our estate planning and the passing on of inheritance to family. You may want to give direct cash assistance to family members straight away, or perhaps may need to adjust your Will and estate plan to reflect the increased assets.
Such decisions need to be considered in the context of your own income, tax and lifestyle situation. There may be options for the management and allocation of your windfall that you need advice on. You may also need to consider any impacts on your social security status so that entitlements are not lost.
All these factors highlight the need for financial advice that takes all aspects of your situation into consideration and lays out options in a simple way, so that you can make a decision best for you.
Take the next step
To discuss your financial situation, make an appointment with a Bridges financial planner.
Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL 240837.
We have an established alliance with Bridges, to provide our customers with financial advice. Bridges has been helping Australians with financial advice for 30 years.
A Bridges financial planner will develop a plan specifically for you; one that’s tailored to your needs and circumstances to help you achieve your goals.
To make an appointment with a Bridges financial planner, call 1800 645 303. The initial consultation is complimentary and obligation free.
This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner or a registered tax agent.
Examples are illustrative only and are subject to the assumptions and qualifications disclosed.
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In referring customers to Bridges, CWCU does not accept responsibility for any acts, omissions or advice of Bridges and its authorised representatives.