Sensible Ways to Spend and Invest a Financial Windfall

Wouldn’t it be nice to come into a large sum of money to spend as you wish? While it’s probably not a strategy on which to hang your financial future; it could happen. Inheritance, winnings, and even a profit made from the sale of your house could one day leave you with a substantial sum of cash, all at once. After the celebration subsides, marking the financial windfall, you may be faced with a number of questions, working out the best ways to spend the money.

Should you buy a new car? Treat your spouse to a luxury gift? Make holiday? Each case is unique, so your financial circumstances dictate the best approach, to a certain extent. However, making sensible moves with the money strengthens your financial health and sets the stage for future prosperity.

If you and your partner are about to come into some money, consider spending it in ways that will benefit you in the long run, rather than blowing through the cash for immediate gratification.

Consider What Type of Person You Are

Existing financial conditions colour how extra money should be applied, within your budget. High earners, for example, may have greater flexibility spending a windfall than UK families living week-to-week. They may have greater access to financial reserves to protect them from missteps. In such cases, it may also be possible to take greater risk when investing the money, because high incomes make it easier to recover from poor investment performance.

If you’re the type of person who is averse to risk, either due to financial conditions at home or personal preferences, a conservative approach may be the best course of action. And when you’re drawn to luxury purchases, beyond your means, it’s probably a good idea to listen to your partner’s voice of reason, deciding how to use the cash.

Reduce Your Outstanding Debt Obligations

Personal debt can place a costly drain on your household finances. Short-term online loans don’t add much debt pressure, because they are quickly repaid, and the loans are typically quite small, compared to other types of finance debt. Credit and store card balances, on the other hand, grow larger over time, as interest builds on whatever’s outstanding each month.

Wiping debts may be the top priority for families allocating financial windfalls. The strategy often makes the most financial sense, because the interest and finance fees you’re paying to service your debt may exceed the best possible returns you can expect from investing the money. That means you stand to lose money, month after month, as unpaid debt lingers on revolving credit cards. To maximise the effect of debt reduction, start by first paying your most expensive debts, and then working your way down the list, wiping the next costliest, and so on.

Boost Your Savings

Many UK families live without adequate savings in reserve – advisors recommend a sum worth 3-6 months’ expenses, put by for emergencies. If you’re among those unprepared for a financial crisis, a windfall can be used to boost your savings or jump-start better habits, putting by cash.

For the best results distributing your money, work out your top savings priorities, and then apply the money as appropriate. Do you plan to buy a house within the next couple years? If so, you may benefit from a Help to Buy Isa or a lifetime Isa, both of which offer government incentives. If your savings priorities include short-term monetary needs, such as buying a car or making home improvements, selecting a one-year fixed-rate Isa may be a better choice.

Financial windfalls may be few and far between, but substantial amounts of money do come into people’s lives. Whether earned from a good investment, won in games of chance, or passed to you from a family member, these guidelines can help you make the most of an unexpected financial windfall.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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