At a recent speaking engagement a member of the audience asked me a question: he’d recently received $50,000 (he didn’t tell me how) and he asked what he should do with it.
When it comes to money, we’re used to hearing,’I don’t have enough’, but what about the people who do have some money? What should they be doing with it? What are their options?
If you were handed $50,000 today, what would you do with it?
In my opinion you should always pay off debt as your number one priority.
Start with your ‘bad debt’ – credit cards, high interest loans and store finance cards.
This kind of debt can be costing you between 15 and 25 per cent per annum on your outstanding balance.
An average working person’s consumer credit facilities could be costing hundreds each month in interest charges, while the capital amount remains, creating a payment for next month.
Once you’ve attended to the high interest consumer debt, look to your ‘good debt’ such as a mortgage.
Putting lump sums into your mortgage can significantly speed the pay-out of the loan, savings you tens of thousands of dollars over the years you carry this debt (look at any online calculator). It’s also tax effective in that most people pay no capital gains tax on their primary residence when they sell.
Once debt is tamed, you should look at using a lump sum to make a return. This starts with an assessment of your risk profile given your life stage.
A good option right now is shares – they are on the rise after several years of poor performance. However, the share market is volatile, so you need to be in a position to roll with the ups and downs, which means being invested for the medium-to-long term. Stick to shares in businesses that are stable and consistent rather than speculative companies that may or may not succeed.
A second option, especially for younger people in employment, is to put it towards a deposit on a property.
As long as you can afford to service the loan, there are benefits to buying a house: you can live in it, you can rent it out and if you buy well you should enjoy capital gains as it increases in value. It would be a great first investment.
Even though property is less risky than shares it’s always a long term investment so be prepared to hold on for 7-10 years.
And don’t forget super. The tax benefits of superannuation are significant, but remember it will be locked away, unable to be used until retirement.
You should strive to have some money in cash in case of an emergency, but also in an account that makes a return above inflation (e.g. high interest savings accounts, active cash funds).
Lastly, always remember that a lump sum of money must work for you: it should be returning growth or income, so you build something for the future, or it should be reducing what debt you have now.
Either way, a windfall is not something that should go to waste.