Very few of us haven’t dreamt of winning the Lotto or waking up to find that we have inherited a large lump sum from some distant relative. We think about the things we could do with it, the new car, the dream holiday, the brand-new kitchen or the shopping trip.
But not too many of us think beyond those imaginative wish lists when it comes to what we might do with newfound wealth. Having fun is important of course, but we should think about the longer term as well.
Should you pay off your debt?
The first thing to think about paying off is your debts, particularly the high interest ones like credit cards. For example, a €5,000 credit card debt could run up an interest bill of €1,233 and take more than two years to pay off if you make the minimum payment of €250 and keep paying that amount each month. All that money, along with the need to make the monthly payments, could be saved by paying off your credit card debt.
The next thing to look at is your car or personal loans, if you have any? An average rate currently would see you repaying almost €12,220 over five years for a car loan of €10,000. That level of interest may not sound too bad, but it would be better off in your pocket, rather than the Bank or lender’s pocket!
And what about your mortgage? Even at today’s very low interest rates you would be surprised at just how much you could save by paying off some or all your mortgage loan. For example, by paying off a mortgage with €80,000 outstanding and ten years to go, you could save more than €14,300. Again, the interest would be better off in your pocket than the bank’s.
Once you’ve looked at what you can gain from paying off your debts, the next thing to address is where to put the rest of it? The best approach here is to look after short, medium and long-term needs and divide your lump sum into three segments.
Short Term Requirements
Short-term needs are usually straightforward to work out. You will usually have a good idea of what extra money you might need over the coming months. In addition to this though, you should also consider putting some money aside to cover any of those unwelcome unexpected costs. Putting that money in a standard deposit account that you can withdraw at a moment’s notice will ensure that you are not caught short should a rainy day come along. But do shop around for the best rates and don’t be put off if you must give notice of a week or two to access your deposit.
Medium Term Requirements
Medium to long-term needs include children’s education bills and other significant costs which you know you need to plan for.
These costs can include:
1) Family weddings
2) Car replacements
3) Home improvements, and possibly even giving your children a helping hand with buying their first home.
Calculating these costs is not easy but it is not necessary to be very precise. The point of the exercise is to ensure that you have a reasonable sum put aside to meet significant costs as they might arise over time. That could mean someone with two children working out the cost or a college education for both children now and putting that amount into a long-term savings or investment plan which offers a potential rate of return which will at least match the rate of inflation and provide some good growth prospects.
Longer Term Requirements
And then there is the longer term. The main item here should be your retirement plans. Do you have a pension plan in-place? How much are your pensions worth currently? What might it pay out when you reach your retirement age? What do you need to put into it to get a decent retirement income from it?
There are all sorts of portfolios and funds which invest in different markets and assets which you can invest in for your medium to longer term goals. There are funds that are tailored to the level of risk you are willing to take so you can invest in a fund with a level of risk that you are comfortable with.
Finally, never make any decisions regarding a lump sum without first taking professional advice. Even what appears to be a large lump can become depleted very quickly if the wrong decisions are made early on, or if you go on a spending spree before putting some of the money out of your reach.
1. Take professional advice
2. Consider paying off your debts
3. Put something aside for the rainy day
4. Look at medium term investments for big ticket items like college fees and car replacements
5. Take care of the long term with pension investments
6. Don’t forget the dream holiday or car!
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based at 27 Cook Street, Cork. For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
Disclaimer: All data and information provided within this article is for informational purposes only. Heritage Wealth Management Limited makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries, or damages arising from its use.