We all dream of that Lotto Win but while the odds of this happening are slight the reality is that over the years of having a mortgage most of us will have a windfall in some form. It may be an inheritance, a bonus, backpay, sale of an asset etc.
The question is – what do to with it? The options are unlimited but they can be broken down to generally categories.
CLEARANCE OF DEBT: This can include lump sums on the mortgage, payment of a personal loan or credit cards. Debt clearance certainly doesn’t sound exciting but debt can be a huge stress and removing that stress or even reducing it can be in itself totally rewarding and help you reach your financial goals.
INVESTMENT: eg purchase of rental property, shares etc. Again it lacks a certain level of excitement but if invested wisely it can again advance you towards your financial goals.
FUN: Funds can be spent on things that will give us enjoyment but not necessarily allow us to progress to our financial goals. The advantage of spending it on “fun” is the immediate reward. It can allow us to let off steam, spend quality time with family and friends, allow us to rejuvenate and continue working hard towards our financial goals.
GIFTING: Kiwis would have to be amongst the most generous people in the world. Remember the old days of “telethon” and NZ would raise more money per person than any other telethon in the world. Gifting gives us enjoyment no doubt about it but sometimes Kiwis are generous to a fault. They can give away funds when they could be using it on themselves for essentials.
Often we are approached to ask what we should do with windfalls. Our recommendation is to plan for those windfalls before they arrive otherwise it can just get eaten up in the normal household cashflow and the money gone before we can spend it on the debt clearance, the investment or even having fun.
What it should be spent on totally depends on the person and their particular situation at that time and what they want to achieve ie their financial goals. A common recommendation we make is to spend AT LEAST 50% on something to advance you towards your financial goals (ie grown up stuff like paying off debt or investment). The remainder can be spent on something that does not advance us to our financial goals but is a priority to us at that time – eg holidays, purchase of a large item or an experience or gifting to family. Because while it is important to do all that grown up stuff we want to remember that life is for living and we do need to get out there and have some fun - otherwise what’s the point?
