Six things to do before you blow your cash windfall
For a lucky few, a windfall will be life-changing. However, with the high costs of living we need to be careful not to be lulled into a false sense of financial security.
Get to know yourself
The first step is to know yourself. This is about understanding your financial personality and the financial habits that determine your default decision-making when it comes to money.
The most financially at-risk personality is "the helper": this is the parent who sacrifices everything for their children, the friend who is the first one to offer support, the one who lends money to friends but never gets it back. Their default is to put others before themselves, often to the detriment of their own future security.
We all have a piece of this personality in us. So you need to acknowledge this and score yourself out of 10 (with 10 being the helper).
The higher your score the less you should share the news about your windfall with friends and family. This is not about being secretive; it is about protecting your future. You may have only one trusted person you share the news with and if you think about helping others this person needs to be your checkpoint.
The next step is to get a clear understanding of your financial position and what difference this windfall will make to your future. You may seek personal financial advice to assist you with this. However, as a guide to prioritising:
- Ensure you have a rainy-day fund, typically to cover three months' expenses
- Look to reduce any loans that are not linked to property. These typically are at a high rate of interest and will free up your regular cash flow for future investment. Write down how much you will save each month in repayments by taking this step.
- Redirect the money saved from step 2 and increase your mortgage repayments or savings by this amount each month.
- Place the leftover money from the windfall into your mortgage or savings account.
- Do the sums to see the impact this money will have on your future. For example, how much sooner will your mortgage be paid off because of this?
- It is time to be grateful, and write a list of opportunities that this windfall will create in your life.
Invest in your future
Now you understand what this windfall means to your future it is time to protect it.
Every purchase you now make will take you a step backwards from the impact your windfall will have on your life. Use this question as your measure: Is that purchase really worth an extra XX years on your mortgage?
If the windfall has been large enough to pay off your home loan, then you can start to invest in your future.