What to do with a windfall

While most people rely on their own toil to generate income, some of us may one day have the good fortune to come into an unexpected cash windfall. Perhaps a rich uncle passes away and leaves us a tidy inheritance, or maybe we are lucky enough to win a lottery. For others, a windfall may be the result of misfortune or mishap, such as compensation or insurance claim, or perhaps a redundancy payout. Still others will end up with a large wad of cash after selling an asset, such as an investment property.

Whatever the source of the money, it pays to be careful about how we deal with it in order to make the most of it. The first instinct may be to run out and buy that car, boat or holiday that we have had our eye on - and for some, that may well be a valid choice. Others may feel the urge to invest it for a rainy day, or use it to pay down debt, or put into super. There are so many choices, but how do you make the right one?

Make an objective assessment
The first rule of thumb is to avoid rushing into any one course of action. There is no "one size fits all" solution that will apply to everyone. You need to gain clarity and objectivity before leaping in any direction, so it is wise to stand back for a moment and consider all the issue at stake and your individual circumstances.

Issues such as your age, current income, current 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 financial planning.

Redundancy payouts need special attention
Redundancy payments in particular can be complex in their make-up and taxation treatment. Making rash or 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 or all of your payout to a new tax 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 diverting some of your payout to superannuation.

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. We may want to give direct cash assistance to family members straight away, or perhaps may need to adjust our will and estate plans to reflect the increased assets that are available for distribution to beneficiaries.

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 underscore the value of having intelligent financial advice that takes all aspects into consideration and lays out options in a simple way, so that you can make informed decisions.

What would you do with a sudden windfall? Share your thoughts below.

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