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At some point in our lives, many of us have daydreamed about what we’d do if we suddenly came into a large amount of money. You might want to use it to tick a few items off your bucket list by taking a long foreign holiday or buying an expensive new car.
Of course, before you start splashing your cash it can often be useful to take a step back and consider all of your options. If you use it wisely then this wealth can have the potential to really transform your life, such as by helping you take your first step onto the property ladder.
With that in mind, read on to find out five valuable tips that will help you to make the most of an unexpected windfall.
1. Make a plan of your goals
When you come into a large amount of money unexpectedly, it can be easy to feel overwhelmed, which is why it’s often wise to build a plan before you start spending.
At this early stage, it can be useful to draw up a list of all the things you want to do with your windfall. This may include buying a new car, giving gifts to family members and friends, or even putting down a mortgage deposit for a home.
Having a clear picture of your short-, medium-, and long-term goals can help you to see which ones are within reach, as well as which could be with some careful management of your wealth. This knowledge can help you to decide what would be the best use of your newfound money.
2. Pay off your debts
If you want to gain more financial stability, one of the best ways you can use an unexpected windfall is to pay off any debts you might have.
Since the start of the pandemic, many Brits have struggled to make ends meet and so have had to rely on borrowing to pay their bills. According to a Bank of England (BoE) study, published in the Guardian, in 2021 1 in 10 households reported that loan and interest payments were a heavy financial burden.
Since many lenders charge a high rate of interest, debts can quickly grow in size if you leave them for too long. That’s why paying off your debts first when you receive a windfall can often be a sensible idea, as it saves you money in the long term.
3. Build an emergency fund
When times are tough, it can be hugely comforting to know that you have a safety net in case an unexpected problem were to arise. That’s why another valuable use for a windfall is to set a portion of it aside to act as a rainy day fund.
Typically, most experts recommend that this should contain enough cash to cover around three to six months’ worth of expenses. Of course, if you are self-employed or work in a field that is particularly vulnerable to financial downturns, you may want to consider keeping a larger amount.
Being able to draw on this emergency fund can be invaluable if you ever run into a problem such as an unexpected bill. Furthermore, it can also help you to avoid having to rely on expensive credit, which could lead to a debt spiral.
4. Decide if you want to invest the money or hold it in cash
One particularly important decision you’ll have to make with your unexpected windfall is whether you want to invest your newfound wealth or hold it in cash.
Typically, if you have a short-term goal in mind, like buying a new car, then it can be helpful to keep some of your money in cash. That being said, holding it in this way for too long can leave it dangerously exposed to the corrosive effects of inflation.
As we discussed in a previous article, this is when the real value of your money is eroded over time, as your wealth grows more slowly than the cost of goods and services. If you aren’t careful, this can seriously slow your progress towards your financial goals.
While the BoE has raised the base rate several times in the past few months, interest rates are typically much lower than the level of inflation. According to the Office for National Statistics, the Consumer Prices Index (CPI) rose to 10.1% in the year to July 2022.
That’s why, if you have a medium- or long-term goal in mind, such as buying a home, then you may prefer to invest your windfall instead. Doing so can help your money to grow much more quickly and enable it to outpace the rate of inflation.
Of course, it’s also important to be aware that this decision carries an element of risk, as the value of your investments could fall in the event of a market downturn.
5. Speak to a financial planner
If you receive an unexpected windfall and want to use it in the most effective way to reach your goals, then seeking professional financial advice can really help.
For a start, when you work with a planner, we can help you to invest your money more effectively. For example, this may involve diversifying your assets, which makes your portfolio more resilient to financial shocks.
Alternatively, we may recommend that you invest your money in a Stocks and Shares ISA. As we discussed in previous article, one of their main benefits is being a tax-efficient way to grow your wealth, as any returns are paid free from Income Tax or Capital Gains Tax (CGT).
A financial planner can also act as a useful sounding board when you make a decision, so you can be confident that you’re making the right choices with how you manage your windfall.
Get in touch
If you want to know more about how working with a planner can help you if you receive an unexpected windfall, we can help. Email us at office@verve-financial.com or call 0330 320 5048.
Please note:
The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
