5 things to consider when you come into unexpected money
Chris Broome – Chartered Financial Planner
Everyone has at some point daydreamed about what they’d do if they suddenly came into a large amount of money. But what would you do if it really happened?
Whether it’s enough money to buy a new car or a gold-plated yacht, if you receive an unexpected windfall you should always think carefully before spending it. Take your time to consider your options as you might be feeling overwhelmed.
If you’ve received a large amount of money, it’s important to be mindful of the limits set by the Financial Services Compensation Scheme (FSCS) on how much compensation you will receive if the bank fails.
Temporary higher balances of up to £1 million will be compensated for in the first 12 months per person per bank or building society. But after that, you will only receive a maximum of £85,000 for any lost savings.
So, if you do decide to put your new-found money in the bank, it might be worth spreading it out across several banks to ensure that it’s all protected.
A large sum of money has the potential to transform your life if you use it wisely. So, read on for five things to bear in mind if you come into unexpected money.
Make a plan of what your goals are
Although we might daydream about it, most people don’t keep a detailed plan on what they’d do if they came into a large amount of money.
However, it is important to make one before you think about splashing your cash recklessly. Otherwise, it can be all too easy to get overly excited and start frittering it away on things you don’t really need.
Write down everything you might want to buy or do with the money, including giving gifts. This could be anything from going on holiday to helping a loved one to purchase a home. Don’t just think about the things you’d like to do now, but those further away too.
It can be easier to plan when you have all the information in front of you, not just vague ideas. A plan will help you see which goals you can afford now, and which goals you may be able to afford in the future, with careful management of your money. Long-term goals might include retiring early or building a legacy to leave behind for your family.
When making this plan, you may benefit from the advice of a financial adviser. We can help you to organise your finances to help you meet your goals in the short and long term.
Pay off your debts to avoid interest payments
Settling your debts is usually the most sensible thing to do if you come into unexpected money.
By settling debts now, you can save yourself from having to repay interest on the debt later, which compounds over time. This can save you large amounts of money, especially if it is a large debt or one with high-interest payments.
It may also be wise to pay off short-term debts, such as overdrafts or credit cards, first since they typically have higher interest rates. After you’ve paid those, you can start thinking about paying off other long-term debts, such as mortgages.
Keep an emergency fund
Nobody can predict the future, so no matter how well you manage your money, it’s always worth keeping a rainy-day fund. This can give you peace of mind if disaster should strike.
Although the spending power of cash is eroded by inflation, it can still be important to keep a fund that’s easily accessible just in case. As a general rule, it’s worth setting aside an emergency fund with enough money to cover three to six months of expenses.
With this, you can rest easy knowing that even if the worst should happen, you’ll have some money to fall back on.
Decide whether you want to save or invest
One important decision you will have to make is whether you should save your new-found money or invest it. Your goals should have a strong influence on what you decide.
If you’re averse to risk, putting your money into a savings account may suit you. Unlike investing, your money is safe from losses, assuming you stay within the limits of the FSCS. But it may not increase in value much, if at all, as current interest rates are likely to be below inflation.
Putting your money in a savings account is also useful if you have a short-term goal in mind, such as booking a holiday.
On the other hand, if you have a long-term goal, such as building wealth to pay for a comfortable retirement, it might be worth considering investing your money instead. Investing can help you grow your wealth in the long term, but it does come with risks. You should invest with a minimum time frame of five years in mind.
Seek the help of a financial planner
If you come into a large amount of money, you should consider speaking to a financial adviser who can help you to use it to achieve your goals.
It might be tempting to think you don’t need one. A study by AKG revealed that 43% of people who had not seen a financial planner/adviser in the last five years believed they already had enough knowledge to make financial decisions for themselves.
However, when you’re dealing with large amounts of money, it can be hard to use it efficiently and understand how it can support long-term goals. Financial planners have experience overcoming the issues that may arise, such as dealing with complicated tax laws, to help you get the most out of your windfall.
A study by YouGov has shown that only 27% of people would consider speaking to a financial adviser after receiving a windfall. If you want to use your money more effectively to reach your goals, you shouldn’t be one of them. Please get in touch to discuss how we can help you realise your goals.
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If you’d like help understanding what the best course of action is, including whether to consolidate, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.