Selling a business, receiving an inheritance or picking the trifecta on the Melbourne Cup can all result in an unexpected windfall.
But working out what to do with the money is not always simple. There are so many options out there and no one wants to throw it all away doing something stupid.
So if you ever find yourself in this situation, here are five tips to take on board.
Learn about tax
Depending on the situation, there could be tax implications associated with your newfound wealth.
To avoid getting lumped with an unexpected tax bill, make sure you understand what these are before making any decisions about what to do with the money.
If there is tax to pay, set aside enough cash to cover it immediately, and if you’re not sure then speak to an accountant.
Park it, before you know what to do with it
Once tax is sorted, it could be tempting to start spending right away, but a smarter option is to sit on the money and take stock.
It may not seem like it now, but it’s actually possible to blow all that cash, just ask Englishman Michael Carroll:
Carroll won £9.7 million at the tender age of 19 playing the National Lottery, then proceeded to blow it all on a rock star lifestyle of partying and excess until he ended up on government handouts eight years later.
That’s an extreme example, but there are plenty of cases where otherwise reasonable people have squandered incredible opportunities through traps like high risk investments, gambling or general financial incompetence and excess.
So why not put the bulk of the cash into a high interest savings account or term deposit and take the time to consider what you actually want to do with the money.
Pay down debt
It’s not as sexy as a new car, but paying down debt is one of the smartest things you can do with some of that extra cash.
For example, paying off a chunk of the mortgage early can save tens of thousands of dollars in interest payments over the life of the loan. And while Australia seems to have an enduring love affair with credit cards, they’re racking up interest at over 17 per cent, so it makes no sense to leave it sitting there.
Debt is a drain on income and the sooner the slate is wiped clean the sooner you can start putting your money to work, which brings us to the next tip …
Seek professional advice
Most people aren’t used to dealing with large sums of money, which is why it makes perfect sense to see a financial adviser in this situation.
An adviser will be able to put a plan in place to maximise the benefit of your windfall and help deal with complex issues such building retirement savings, responsible investing, insurance and estate planning. And it’s not just the boring stuff either. If your heart’s set on a new car or you’re looking to buy a bigger house soon, they can build that into the plan too.
And finally … be careful who you tell
People do funny things when money is involved. Even seemingly close friends and family members can have their judgement clouded, while some people are just downright greedy.
This can be compounded if you look to share your money with anyone, for example a gift to a struggling sibling may be misconstrued as a free-for-all by the extended family. While ultimately it’s your decision, think twice before posting a Facebook update about your good fortune, and make sure you trust the people you decide to tell.
