Received an unexpected windfall? How to do the right thing with it
If you’ve won the lottery, received a bonus at work, or inherited a small sum of money out of the blue it might be tempting to put it towards a dream holiday. However, there are far more valuable things to do with the money.
Most of us dream of our numbers coming up or inheriting vast sums of money from a long-lost relation but no matter what the size of the windfall you probably don’t want to blow it all in one go.
Instead, there are lots of sensible options which will benefit you over a much longer period and could even help you to earn more money on your winnings.
Pay off your debts
If you have outstanding debts, from something like a credit card or personal loan, this is the first area to tackle.
In the last year many households have been squeezed financially because of the pandemic and if you’ve had to take out more debt now is the time to address it.
At the end of 2020, nearly nine million people had to borrow more money because of the pandemic. The proportion of people borrowing £1,000 or more increased to 45 per cent, from 35 per cent, in the second half of the year, according to the Office for National Statistics.
You may decide not to clear your debts completely, but you should look at those which are costing you the most money.
When you’re charged interest on your debts it takes a lot longer to become debt free because you’re paying out extra money on the debts each month.
If you can clear those charging the highest rates of interest you’ll instantly have more money in your pocket – which can be used to clear any other debts or for your savings.
Nearly 9 million people had to borrow more money because of the pandemic
Save for a rainy (holi)day
Over our lives there are many events to save up for whether it’s learning to drive, a new car, a house, weddings, education, holidays, and retirement.
If you're thinking about a big outgoing in the future it’s well worth putting a sum of money away for this from your windfall.
That way, when it happens you’ve got the money saved for it rather than having to go into debt to fund it.
Plus, even if you don’t end up taking that course or going on that dream holiday, you’ve still got the money to spend on other things.
Savings rates have been dire recently but that doesn’t mean you should ignore them. If your money is earning interest, no matter what the rate, this is still better than if it’s not.
Rates have also started (slowly) rising recently.
Usually, the longer you can lock money away, the higher the interest rate. However, now with rates being so low, a shorter-term account may work better for you.
When rates do improve, you’re then free to move your money into an account that pays more interest.
Invest for the future
Another way to make your money work for you is by investing.
This isn’t to be taken lightly, and not a short-term option. But in the long-term, investments do usually outperform cash savings.
It’s also not as safe as a savings account, because while you hope to get a significant return, there’s always the possibility you could lose your money completely.
Pension possibilities
If you don’t have a pension, or you’re worried it won’t be enough for retirement, you could also put some of your windfall into a pension pot.
It’s easy to find out when you're predicted to earn your state pension, and how much it will be, via the government website. If it’s a private pension, your provider should give you the same information or it may be on a recent pension statement.
You’re able to make extra contributions to your pension if you choose to. Putting some of the windfall into your retirement is a good way to future-proof your finances and take away any stress or worry about your income when you stop working.
Build a safety net
We’ve talked about using the money to clear your debts, and putting it somewhere for the future, but what happens if right now you’re faced with an emergency?
Your car conks out, the boiler breaks, or you lose your job? It’s always worth having an emergency savings fund just in case the worst does happen.
Experts usually say between three and six months of your regular income is the ideal amount to have set aside.
Depending on the size of your windfall, putting this amount away into a savings account which you can access at any time can save you a lot of money down the line. Plus, anything you can put away will help, and if it’s earning interest your money will only grow.
3 things to do right now...
Think about putting any surprise the money towards clearing expensive debts, starting with those paying the highest rate of interest.
Make a savings plan – things you’d like to have money for – and think about putting some of the windfall into a savings account paying interest.
Create an emergency fund to pay for unexpected costs, anything you can put away will help you in the future.
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Don’t forget that while you may think that this article is brilliant, it is intended for information purposes only and should not be mistaken for financial advice or recommendations.
