Unfortunately according to The National Endowment for Financial Education in America, when we get an unexpected lump sum of money, 70% of us will lose the money within a couple of years.
Coming into a big sum of money may seem like the perfect problem, but if you have ever received a windfall of money you may have found yourself nervous about the big sense of responsibility or scared that you will do the wrong thing with it.
But it isn’t actually that complicated.
Whether your windfall is from a tax refund, inheritance or a bonus, here are some ways to spend this extra cash wisely:
Pay off personal debt
According to MoneySmart, Australians currently owe $33 billion in credit card debt. That is an average of $4,200 per card holder costing around $750 in interest per year.
So, if you owe anything on your credit card then paying it off should be one of your top priorities. Putting your extra money towards your debt will reduce your financial stress and get you on track to being debt free.
You may also choose to use this extra money to pay down your mortgage or any personal loans. By paying off your debts, you will save even more money – by paying less interest.
Create an emergency fund
Do you have any savings for emergencies? If not, then this should be a priority.
Ideally you will want to build up enough savings to cover 3-6 months of expenses to cover your rent or mortgage, groceries and electricity in case you are ever between jobs for that long. You may even choose to put aside enough to cover 6-12 months. It is up to you.
This may seem like a lot of money, so it is best to start with at least $1,000 in the bank to cover routine emergencies like car repairs, and then grow your emergency savings from there.
Put some aside for retirement
Are you on track for retirement? If you’re not sure, then it’s a good idea to chat to your superannuation fund advisers or a financial planner to help you project your retirement income. If you need to save more, then you should contribute that pot of extra money straight into your superannuation fund. Extra contributions can really boost the amount you will retire on, especially since your super keeps on growing with compound interest.
If you are on a low income then this option becomes even more attractive, because the government will match your after-tax super contributions. They will match 50c for every dollar you contribute, up to a maximum of $500.
Put it in a high interest savings account
While you are choosing what to do with the money, why not keep it growing in the meantime, in a high interest savings account? Although interest rates are low at the moment, if you put $4,000 into a high interest savings account that earns the current maximum total rate of 3%, then in 5 years’ time that deposit will grow to $4,637.
Don’t forget to have fun
Lastly, make sure you also have a little fun with your windfall and allow yourself to celebrate. Make a reservation at a nice restaurant, book a holiday, or buy yourself a nice gift.