Have you recently been lucky enough to come into a lump sum of money? Here are some questions to ask yourself so that you can work the best financial decision for you and your dependents.
Sadly, I haven’t just inherited a large sum of money, but a close friend just did. The conversation I tried to have with her – while she was acting like a headless chicken – got me thinking about the questions I’d need to ask myself to figure out what to do with a windfall (apart from a holiday, a whole new wardrobe of clothes, hiring a cook and a cleaner…).
Here are 5 questions that I’ve found from doing some online research, which have helped my friend and I hope will help you plan too (and not be a headless chicken!):
1. Decide what your financial priorities are
Write down all your debts and which ones you are paying the most interest on (if you are). It would be worth putting any debt that you are paying high interest on at the top of your what-to-do-with-my-windfall list.
2. Do you want your windfall to supplement your income on a monthly basis or use it to make a one-off purchase?
Think about whether your monthly income is adequate. If it’s not, you could pay your windfall into a deposit account and set up a monthly standing order to your current account. If you’re monthly income is sufficient, it may be a good time to spend money on your property, put down a deposit on a new home or possibly put it aside for future education fees.
3. Think about risk
If you’re risk adverse, think savings account or bonds. If you’re not risk adverse, talk to an investment advisor about investing your money (or part of it) in stocks and shares.
4. Lend to others
If you have an entrepreneurial, risk-ok attitude, you might like to look at peer-to-peer (P2P) lending, where you lend money through an online platform to other individuals and sometimes start-ups. Some P2P returns are as much as 7.5% (Funding Circle), but you need to fully understand how it all works and the risks before diving in. Read Martin Lewis’ P2P lending article on MoneySavingExpert.com for a thorough explanation.
5. Share the love
If you have close relatives and friends you’d like to gift some of your money to, that may well be a tax-friendly thing to do. In the UK, any financial gifts you make will be inheritance tax free, as long as you live for another seven years after giving the gift. And there’s a £3,000 annual gift allowance, which means you can give away £3,000 a year without any tax implications. Check with a tax expert in the country where you live if there are similar tax exemptions that you could benefit from.
In general, don’t rush to make a decision, take your time, but not too much time in case there are tax implications of leaving the money where it’s temporarily come to rest. And, lastly, always seek expert advice before committing to any form of investment.
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