With $50 million on the line in this week’s Powerball draw, there’s sure to be more than a few people dreaming about what they would do if their numbers came up.
Embarking on a spending spree might seem like the most tempting option when you’re on the receiving end of any sort of financial windfall, whether you’ve had luck in the lotteries or come into an inheritance.
But when the glow you get from buying something new has faded, what will you really be left with?
Something you probably didn’t need in the first place, and the lingering sense you could have done so much more with that unexpected injection of cash.
Consider setting aside the bulk of that lump sum for one or more of the following options:
1. Top up your emergency fund
You never know when you might need a bit of extra cash. Most Australians fail to prepare for the worst, with a Commonwealth Bank survey revealing one in three people would struggle to find even $500 in an emergency. But a “rainy day” fund is as important to you as a safety net is for a tight rope walker – without it, there could be devastating consequences if something trips you up. Make the most of your windfall by topping up your emergency fund – a good guide is to aim for at least three months’ worth of your current net income.
2. Pay off the credit cards
With some credit card interest rates closing in on 20 per cent, paying off this debt should be one of your main priorities. Putting everything on your card is an easy trap to fall into, but if you aren’t paying off your balance at the end of every month, it’s amazing how quickly those interest payments can add up. Why not take the opportunity to pay your credit cards off in full and then cut them up so you can’t start the cycle all over again. Break the habit of relying on your card and instead start budgeting and saving towards your goals.
3. Reduce the mortgage
The credit card company isn’t the only one making money from charging you interest. While home loan interest rates may be at record lows at the moment, that doesn’t mean they aren’t still costing you thousands of dollars each year. By paying more off your mortgage, you’ll be able to reduce the amount you owe even faster, cuttings years off your loan and saving thousands of dollars in interest in the process. Some banks have limits on the amount of extra repayments you can make in a year so take the time to read the fine details and work out exactly how much you can pay to get the bank off your back sooner.
4. Invest in the future
Make your unexpected windfall work for you for years to come with the magic of compound interest. Given enough time, even modest returns can lead to exponential growth on your money. Figures from Vanguard Investments show that if you invested $100,000 in Australian shares on July 1, 1997, that portfolio would have been worth $470,566 on June 30, 2017 – a cumulative return of 380% over 20 years (based on performance of the ASX300 index during that time). It’s hard to argue with those numbers, however it’s a good idea to get some advice before you leap into the market for the first time.
5. Invest in you
Sometimes, the best investment you can make is in yourself. All work and no play can lead to rising stress levels, which in turn can have an effect on your health and home life. Switch off for a little bit and treat yourself to a well-earned holiday. While on the surface this may seem like the most frivolous use of your windfall, taking the time to relax and recharge can help reduce the risk of burnout and pay massive dividends when it comes to your physical and financial well-being.
Do you want to make the most of your money but aren't sure where to start?
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