If you’re fortunate enough to come into a fairly significant sum of money, it can occasionally cause confusion and some problems, rather than immediately solve them, especially if it comes during a period when you’ve been tightening your belt and are eager for some relief. A sudden windfall can be a very welcome but also intimidating prospect, and it’s also quite rare, so what’s the best approach and how do you make the most of the money that you have?
Tax implications
One of the most important considerations is tax – different windfalls will have different tax implications, and this needs to be dealt with before anything else. If some of your lottery numbers came up, you’ll be pleased to hear that no taxation applies, unless it’s included in an inheritance. This would then come under the general bracket of inheritance tax, which can vary heavily. If it’s a work bonus, your employer should have taken care of the tax and National Insurance on your behalf already, but if you’ve sold an asset, share or property, and have funds that exceed £10,900 (tax year 2013-2014), you’ll be required to pay capital gains tax.
Take care of your debt
The next step that is generally advised is to look at all of your finances and focus on taking care of debt and the weakest areas. Julie Hedge, an independent financial advisor with Christie Scotts in Surrey, advises that “people who have large consumer debts such as credit cards, overdrafts, and personal loans should clear those first.” Investment potential and extras should be considered after this essential is taken care of, and some might find that they don’t have too much left for a big family holiday once their credit cards have been cleared. However, freedom from debt can be a major weight off many people’s shoulders, and either ease or eliminate monthly payments altogether, meaning that your overall monthly savings could be much greater and there’ll be some left over for that holiday in time. If you’ve always dreamed of being debt-free, this could be the answer.
Try not to be tempted
Whatever is left, after the tax is paid and you’ve taken care of your debts, then needs to be kept completely separate from your day-to-day finances. This might seem like an obvious consideration, but it’s surprising how easily your new found wealth could be whittled down with a purchase here and an expensive meal there. As tempting as it is to start spending, particularly if you’ve been keeping a tight budget previously, it’s a must to keep this in a separate account.
Your plan might still be to live expensively for a while, or blow it all on one big purchase, but it’s much better to do this once you’re informed and have ruled out other options. Purchases that are perceived to be small will add up over time, and your big, planned purchase might disappear to nothing once you step back and look at what you’re left with after some rather expensive ‘decision-making time’. So don’t rush out for a bottle of Bollinger just yet.
Consider your investment options
Most savings accounts won’t accrue a great amount of interest, but they are a good intermediate place to put any amount of money that you want to keep safe, be it modest or significant. To get a great return, there are lots of investment options out there with varying amounts of risk and reward. It’s always recommended that advice from an independent financial advisor is sought first, they will take all of your finances into account, consider the pot that you have and give independent, professional advice.
Peer-to-Per lending is a reasonably low risk investment that’s a high interest alternative to what’s offered by most high street banks’ savings accounts. As little as £10 can be invested, for those who want to try a platform out before investing a larger sum, and the online application takes only a few minutes. P2P has been praised for its accessibility, and though it isn’t regulated by the FSCS, it is by the FCA. Borrowers are protected by a provision fund at Wellesley & Co, a discretionary fund that the shareholders have created for the purpose of compensating customers if a borrower fails to repay their loan.
Your windfall can be used for a whole variety of things – helping friends and family, paying off debt that’s been a burden and even that around the world trip. Consider all of your options first, and then you can make a fully informed choice.