Everyone dreams of getting a windfall, but many people who suddenly find themselves with a large gift of cash feel too panicked to do anything more than keep it in a savings account. So if you’ve just received a redundancy pay-off or inherited a sum of cash, here’s what to do.
Buy freedom—pay off your debts
If you have any expensive debts such as loans, credit cards and store cards, you should pay these off in full before you do anything else. The only exceptions are debts with 0% interest rates, such as 0% balance transfer credit cards. You should pay off all your debts as soon as you can, even if you find that it uses up your entire windfall.
Get rid of your mortgage
Once your expensive loans and cards have been paid off, think about your mortgage. Paying off your mortgage is one of the best and safest investments you can make. It’s tax-free and a safe bet—once you’ve paid it off, you’ve paid it off—and you’ll own your own home.
However, if you’re on a fixed-rate mortgage you may not be allowed to pay off more than 10% a year without penalties. Work out which would be the best value to you: paying it off now and incurring a penalty, or just paying off an extra 10% each year until the fixed rate finishes and then paying the rest off.
Set up a savings safety net
Everyone should have money set aside to cover their basic expenses for at least three months, ideally six—so work out how much you have to pay out every month for essentials (if you’ve paid off the mortgage you won’t need to factor this in), multiply it by three (or, better still, by six) and put that amount into a savings account that you don’t touch unless you hit hard times.
Get your money working for you
If you have money left over after following the steps above, get your money working for you by investing it for the long term. You must remember to spread your money across different asset classes (types of investments) and reduce your tax where possible.
You’re allowed to put up to £40,000 a year into pension products. Consider setting up a stakeholder pension or a SIPP (Self-Invested Personal Pension) and pay into one of those. Stakeholders are the easier option, so go for that if you’re a novice investor. However, SIPPs can be a great way of controlling your investments and getting the tax benefit of a pension wrapper at the same time.
Also, make sure as much of your money as possible is put in an ISA. You can save up to £15,000 in either cash or stocks-and-shares ISAs, or a mixture of the two.
You could also consider putting money into National Savings and Investments (NS&I) products, which are also tax-free. But again, most of them, even with the tax-break, don’t perform well enough to be really helpful in the long term.
Give some away
If you have children or grandchildren, you could help them get onto the property ladder or pay their university fees with some of your windfall. Remember that they won’t have to pay inheritance tax on money you have given them if you survive for at least seven years after handing the money over. Not only that, but if you give it to them while you’re alive you’ll be around for them to say thank you!
Read more articles by Jasmine Birtles here