How to spend a lump sum for great returns

Imagine you’re sitting with your lotto ticket, waiting for the final ball to drop, and, as it spins into focus, you realise you’ve just won R1 million. Anyone in this position would be ecstatic!

But once your excitement settles down, you’ll have to consider what best to do with this money. If you suddenly find yourself with an inheritance or a bonus, you’ll be faced with the same questions.

At JustMoney, we got in touch with two financial experts to find out how you should spend your newly acquired lump sum.

Tip: Invest in a unit trust today to see your money grow over time.

Before you start spending the money

According to Janine Horn, financial planner at Momentum Financial Planning, being awarded a lump sum in any life journey means the following:

• You have been gifted the opportunity to change the trajectory of your financial life and financial journey. You can rewrite and edit chapters going forward so that you have a solid foundation for building your financial future.
• You need to carefully assess your relationship with money and get an understanding of what habits may need to be unlearned, as well as where your behaviour, habits, and your energy and thoughts around money may need to shift. You need to become more financially astute – no matter your current level of knowledge, there is always room for improvement.

“Identify the difference between wants and needs. This is an important aspect around how you are going to spend and invest that money,” says Horn.

According to Sheila-Ann Robey, financial adviser at Lifeguards, an affiliate of Liberty, the wisest decision to make when coming into money is to speak to a trusted financial adviser to guide you through the best possible solution to suit your needs.

“Whether the best solution would be to invest the lump sum, or to utilise it to settle debt or purchase property, is dependent on each individual’s circumstances,” says Robey.

She explains that factors such as age, appetite for risk, tax implications, and potential investment horizon all play an important role in the decision-making process. An adviser is equipped to assist individuals in making logical decisions to best serve them in the long run.

READ MORE: Sceptical about financial advisers? Here’s how to find one you can trust.

Common mistakes made when receiving unexpected lump sums

Robey says that the question of what to do with lottery winnings is often a topic of debate in her household and, if she found herself in this situation, she would invest it in a range of different investments that are aligned with her personal financial plan.

She insists that whether she comes into a large lump sum or not, her financial plan will not change – it will only be very pleasantly sped up.

“The most common mistake when individuals receive an unexpected lump sum is that they spend their money irrationally, either on unnecessary luxury purchases, investing in poor business ventures, or supporting friends and family,” says Robey.

She points out that lottery winners or heirs to a large inheritance often end up broke in a matter of a few years due to these common mistakes.

“It’s understandable that people seek to fulfil their deepest desires when coming into money. But with the right assistance, a sound financial plan can be put into place, which will protect the individual from making emotionally-driven decisions which could erode their newfound wealth,” says Robey.

So, what should you do with the money?

Robey believes that once you’ve created a sound financial plan, it’s an easier and far less emotionally-driven decision to allocate some of your money to treating yourself to something you really want.

“Perhaps home renovations or a trip overseas can fulfil that human desire and act as a reward for making good financial decisions with the bulk of the money,” says Robey.

She adds that these good financial decisions will inevitably support your future self, and hopefully create a legacy for your family.

When it comes to spending your lump sum, Horn recommends distinguishing between your wants and your needs.

When considering investment options, she suggests revising the following factors:

• Lump-sum investments from winnings or donations are considered voluntary money and can be invested in a whole host of ways, depending on your appetite and goal for this investment. When we speak about appetite, we are referring to your understanding of the concept of asset classes, aggressive strategies versus interest and money market instruments, and a short-term more cautious strategy.
• You also have the option to choose between a fixed-term savings vehicle or flexible term. Fixed-term investments mean you will leave money invested for a period of time and it is generally locked into that time based on the nature of the product.
• This type of product is governed by the long-term insurance act or collective investment scheme platform. One example would be an endowment policy such as an international or local endowment.
• There are various options you need to consider – timeline (sometimes known as the investment horizon), whether you want to invest conservatively or aggressively, and whether you want flexible access to your money.
• Lastly, depending on what you decide, you need to be aware of the tax components of these structures. The South African Revenue Service taxes gains such as interest, dividends, and capital gains. But certain products have certain tax exemptions – areas where you don’t need to pay tax. Depending on the nature of the investment and the type, your taxation differs. Taxation could be in your fund or in your hands.

Horn notes that how you invest also depends on your age and financial needs. For example, you could be an older person who would like to supplement your income from this money, or you may want to utilize the money for the purpose of an asset like a home loan, or for pure wealth creation.

You can add your lump sum to your retirement. Click here to start planning for your retirement today.