If you suddenly receive a cash windfall – be it from an inheritance, work bonus, or selling your business – it can be tempting to spend some of it on a dream purchase you’ve been considering.
However, it’s often wise to resist the urge to spend money on non-essentials; otherwise, you might end up regretting it.
In fact, in a survey reported by Euronews, 43% of respondents said spending their money on useless things was a significant regret.
Instead of squandering your windfall or making less sensible decisions with it, there are several things you could consider first to ensure that you use this wealth to support your wider financial plan and help your progress towards your goals for the future.
With that in mind, continue reading to discover five prudent things to do when you receive a windfall.
1. Review your goals
It’s easy to feel overwhelmed when you unexpectedly receive a considerable sum of money. For example, if you’ve received your wealth from an inheritance, you might feel full of grief, which can affect your decisions.
Even if your windfall comes from a less unfortunate source, such as a work bonus, the excitement can still cloud your judgment.
So, it’s worth sitting down, taking a deep breath, and reviewing your goals before you spend any of it.
You could start by drawing up a list of your short-, medium-, and long-term goals. This could include anything, such as:
- Buying a new car or taking a dream holiday in the short term
- Paying off debt or fortifying your emergency fund in the medium term
- Bolstering your pension for your long-term future.
Having a clear picture of your various goals could help you realise which are within reach, as well as those that could be with some careful wealth management.
This could, in turn, allow you to decide how you could use your windfall to best achieve those targets.
2. Build or bolster an emergency fund
It’s not uncommon for unexpected events to hamper your progress towards your long-term goals throughout life. A sudden car repair or period of unemployment, for instance, could drain your savings.
It can be highly comforting to know that you have a safety net to help cover unexpected expenses without using up savings you’ve earmarked for other purposes.
As such, you might want to use your windfall or bonus to build an emergency fund or bolster an existing one.
While there’s no fixed amount for an emergency fund, a good rule of thumb is having between three to six months’ worth of necessary household expenses in an easy access savings account. This way, you’ll have sufficient funds to support you for a fairly extended period that you can access the moment an emergency arises.
If you’re self-employed, or have many dependants, it could be prudent to save even more – perhaps as much as 12 months’ worth of household expenses.
Additionally, if you’re in retirement, saving between one and two years’ expenses in your emergency fund might be prudent. By doing so, you might not have to sell the investments held in your pension during a period when markets are low or volatile.
The peace of mind an emergency fund offers can be invaluable. Not only could you avoid having to rely on high-interest debt to cover unexpected expenses, but you’ll have more confidence knowing that you can weather financial emergencies without derailing your progress towards your long-term goals.
3. Clear your debts or repay more on your mortgage
Speaking of debt, it can be a heavy burden, both financially and mentally.
So, if you have any high-interest debt, such as that from a credit card, you might want to consider using your windfall to pay this off. Otherwise, it could quickly snowball, leaving you with a more significant burden while negatively affecting your mental wellbeing.
Even if you don’t have any outstanding high-interest debts, it might be prudent to use your windfall to pay off some, or all, of your mortgage.
This could be especially beneficial if you’re approaching retirement, as it could reduce or even entirely eliminate the need for you to use your pension to cover mortgage payments.
You can typically repay up to 10% of your outstanding mortgage balance without incurring an early repayment charge. Bear in mind that it’s worth checking with your lender to find out exactly how much you can repay before you commit to this.
4. Decide whether you want to invest the money
If you have a short-term goal in mind, such as buying a new car, it could be helpful to keep some of your windfall aside in cash savings.
However, holding it this way for too long could leave your wealth exposed to the effects of inflation. This is because if the rate of inflation is higher than the interest you receive from your bank, your wealth’s purchasing power is eroded.
Granted, the Office for National Statistics does reveal that the Consumer Prices Index (CPI) rose by 2% in the 12 months leading to May 2024. Meanwhile, Moneyfacts states that the best rate offered by an easy access savings account as of 1 July is 5.2%.
In this instance, your cash savings could outpace inflation. Though, it’s important to note that inflation can always rise, and interest rates could fall, so long-term cash savings might not reliably outpace the CPI in many cases.
As such, you might want to invest your wealth instead for greater potential returns. For example, IG reveals that the annualised total returns of the FTSE 100 stock market index are 7.48%.
Similarly, when it comes to investments versus cash after accounting for inflation, data from Vanguard shows that the annual real returns for UK shares since 1901 have been more than 5%, compared to just 0.87% for cash.
Investing could be especially worthwhile if you have some long-term goals in mind, such as bolstering your retirement fund.
Investments carry risk. 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.
5. Speak with a financial planner
Regardless of your financial situation or goals, consulting with a financial planner regarding your windfall before you spend it could be highly beneficial.
A professional could help you devise a personalised strategy for managing a sudden windfall. Indeed, they could assess your risk tolerance, ensure your portfolio is adequately diversified, and recommend the most suitable investments for your needs, all of which will align with your long-term goals.
Moreover, they could act as a sounding board, offering guidance and ensuring that you feel confident when making decisions involving your windfall.
To find out how we could help you, please contact us by email at info@investmentsense.co.uk or call 0115 933 8433.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
