We've all had those 'what if' moments, where thinking big gives us a rush of adrenaline. But seriously, before you rush off on that long dreamed of holiday, what should you do if you were lucky enough to land a windfall?
Here are three practical options to consider:
1. Pay off debt
Paying off debt is one of the most financially sensible things you could do. In today's debt-fuelled world, it's wise to pay off loans which charge you the highest rates of interest, such as credit cards, car or personal loans, store cards or short term loans, before you think of doing anything else with your cash.
Only then should you consider paying off your mortgage, in full or in part, because your mortgage is likely to be charging you the lowest interest rates. Apart from the savings you'll make from lower interest payments, getting rid of debt could also eliminate financial stress and allow you to focus on smarter financial decisions for your future.
2. Build up your super balance
You should consider taking advantage of non-concessional contributions and build more of your wealth within super, rather than having it all invested in your own name in the bank. Non-concessional contributions refer to after-tax amounts which are indexed each year.
From 1 July 2015, you can contribute $180,000. But if you are 64 years old or less anytime in the financial year and you make a non-concessional contribution, it would trigger a ‘bring-forward’ provision, and you could contribute up to $540,000. This would result in a significant tax saving on your investment earnings, but it would depend on your personal income levels. Keep in mind, though, that the downside of building up your super is that you cannot access the money until you stop working or retire.
3. Diversify your investments
Keeping large sums of money in the bank at current term deposit interest rates may not be the best investment in the long term. You could work out what large capital expenses you may have over the next three years and leave this sum in the bank, but the remainder should be invested in a more growth-oriented manner, depending on your appetite for risk.
If you have already purchased an investment property, you could consider building up investments in Australian shares, international shares and other asset classes to diversify your investment portfolio.
You could also look at a managed fund that is appropriately diversified across a number of asset classes, but a good portion should be in Australian shares to deliver the growth that can be achieved over the long term with this asset class.
4. Seek professional help
If you find yourself receiving a windfall, it is wise to seek professional help. As with any income there are capital gains taxes that might need to be consider, and depending on your stage in life, investing in your super balance could make better long term sense than diversifying investment or vice-versa.
For more on how to manage a windfall, speak to your Leenane Templeton financial planner on 02 4926 2300
Source: Colonial First State