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Coming into cash

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Have you just received an inheritance or a bonus from work? The temptation is to blow it all on clothes or a big holiday. If you’re wise, you’ll enjoy some of that windfall now and invest the rest of it in your future.

Where are you heading?

What sort of lifestyle do you want in 5 years, 10 years and beyond? When you know where you’re going, you’ll have a better idea and more incentive to use your windfall wisely.

Do you want to further explore goal setting? Go to our Getting Started online workbook.

A basic windfall investment strategy - the rule of thirds

Are you unsure how much of your windfall you should spend now and how much you should keep for later? A rule of thumb is the 'rule of thirds' – 1/3 for now, 1/3 for the medium term, and 1/3 for the long term.

Examples of short, medium and long-term goals

Here are some examples of how you might use the money for the short term, medium term and the long term.

  • Short term (this year): Pay off a credit card, buy clothes, take a holiday
  • Medium term (1-3 years): Buy a house, pay for children’s education
  • Long term (> 3 years): Save for retirement

What are your investment options?

To achieve your goals, where should you put your money? You may feel overwhelmed by your options, but you might be surprised to learn there are ultimately only two types of investment: debt investments & equity investments

  • Debt investments – you lend money to an institution that pays you a return (eg savings account, term deposit, cash management trust). These investments are good short-term options because they usually give you easier access to your money.
  • Equity investments - you buy an asset either partly or wholly (eg shares or property). They are good medium term to long term investments because the returns are usually higher than the returns from debt investments.

What to invest in for short, medium and long-term goals

You’ll be pleased to hear that this is really quite simple.

  • To achieve short term goals – invest in short-term investments (e.g. debt investments, term deposits)
  • To achieve medium term and long term goals – invest in medium-long term investments (eg equity investments, property, shares)

Why you shouldn’t use short-term investments for long-term goals

If you choose short term investments (eg term deposits) for long-term goals, your savings won’t grow as quickly as they could grow. Equity investments tend to produce better returns than debt investments. You’ll also find that with short-term debt investments, you’ll pay more tax.

Why you shouldn’t use long-term investments for short-term goals

You might be attracted to the higher returns of shares and property but they are not reliable options in the short term. For these assets to appreciate in value, you need to be in those markets for five years or more. That’s why you should use only short term debt investments for your short term goals.

Applying the rule of thirds

To see how you can apply the rule of thirds, let's look at what Sally did when her Uncle George left her an inheritance.

Case  Study -  Inheritance

Under his will, Sally’s Uncle George left her $60,000. Sally's first instinct was to spend it all immediately but her financial adviser recommended that she invest some in her future. Here is what Sally did with her windfall:

Short term:

Paid off a $5,000 credit card debt and saved on interest
Set aside $5,000 for an overseas holiday
Paid $10,000 off her car loan and saved on interest
Short term total: $20,000

Medium term:

Put $20,000 into shares – to achieve her goal of buying her own house.
Medium term total: $20,000

Long term:

Put $20,000 into her super – which will allow her to retire earlier.
Long term total: $20,000

'Some for now, some for later' is the best approach when you receive a cash windfall.

Want help with your cash windfall strategy?

If you want to talk to an expert about what to do with your cash windfall – or anything relating to your financial future, call us on 1800 046 144 or email us.

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