Yield of dreams: what to do with your windfall
An unexpected injection of cash almost inevitably sparks the urge to travel, quit your job or buy a pony – at the very least it’s tempting to hit the shops at the Paris–end-of-town; but we’ve got some wiser ideas for longer term gains.
The odds of winning Thursday night Powerball jackpot aren’t great (about 76,676,600 to one in fact) but that hasn’t stopped most of us giving some thought to how we’d spend the big one.
On the other hand, receiving an inheritance is actually quite likely – according to a 2017 Griffith University report, Australians over 60 will transfer $3.5 trillion in wealth to the next generation over the next 20 years.
With an estimated 7.5 million children of this generation – if 70% of wealth is transferred – about $320,000 on average will be passed on to each child.
Deciding what to do with such a windfall requires some serious thought.
The problem with “found” money
Behavioural economics suggests we tend to think of windfalls as “found money” and so put it in a different mental category than regular income – we don’t always treat it the same way we do with earnings.
Lottery winners are an obvious case; one study found that winners only saved about 16% of their winnings.
The numbers are better for inherited money, but still not ideal – another study found people in their 20s, 30s and 40s save roughly half of the money they inherit, and the other half is either spent or lost investing.
Mercer Financial Advice national practice manager Johann Maree says the first thing to do is “probably nothing”.
“Receiving a windfall without any warning can create stress and mess up your decision-making capabilities,” Maree says. “A sudden windfall can dramatically change a person’s financial picture and result in some irrational decisions. You need to take some time and address your emotions first; otherwise you run the risk of making mistakes that you’ll regret later.”
Maree says the worst possible move would be to cry “FREEDOM!” and quit your job. Instead he suggests you give a little thought to the long-term consequences of pulling the plug too early.
“The obvious loss of wages, workplace benefits and employer contributions to superannuation can impact on your financial position now and in the future,” he says. “Meeting with a lawyer, accountant and financial adviser can provide valuable perspective and help you to set up a long-term financial plan.
“By taking a deliberate approach you’ll be better able to ensure your values and goals are aligned and make smart decisions.”
First things first
Obviously this varies depending on individual circumstances, but from Maree’s perspective, it pays to think ahead.
“The number one thing I would recommend is paying off high interest debt such as credit card debt (and then close the accounts) as well as personal loans as soon as possible,” he says. “I would recommend setting up an emergency fund equivalent to three months’ salary, then topping up your super by making non-concessional contributions.”
Have (a little) fun
Maree says it’s OK to “spend a little on yourself”; but he really does mean “a little” – not more than 2-5%.
“Perhaps the biggest mistake people make is to spend the money – or invest it – too quickly, but it has been shown that a small indulgence can reduce the urge to blow the entire windfall,” Maree says. “The longer you take to think through all the options the better off you’ll be in the long run.”