MONEY 101

How to han­dle an un­ex­pected wind­fall

Finweek English Edition - - FRONT PAGE - BY KRISTIA VAN HEER­DEN

We are of­ten paral­ysed by the idea of in­vest­ing, but be­com­ing a suc­cess­ful in­vestor starts long be­fore you make your first in­vest­ment. In this se­ries of ar­ti­cles, Finweek draws up a road map to get you from fi­nan­cially flus­tered to in­vest­ing with con­fi­dence. So far, we’ve helped you make sense of your payslip, dis­cussed ways to sup­ple­ment your in­come and had a look at your credit score. Visit Finweek.com to view all ar­ti­cles in this se­ries.

From time to time a happy co­in­ci­dence be­falls us and we re­ceive an un­ex­pected cash in­jec­tion. This is rea­son to re­joice, to be sure, but sadly not rea­son enough to in­dulge.

A wind­fall is any amount of money re­ceived un­ex­pect­edly, like a tax re­bate, an un­hoped for but well- deser ved bonus, a prize or a gift. Sadly, wind­falls don’t come around of­ten, but plan­ning for po­ten­tial good for­tune should form part of a well-thought-out long-term f inan­cial strat­egy.

Should good for­tune be­fall you to­day and you don’t yet have a plan, cer­tif ied f i nan­cial plan­ner Gerald Mwan­di­ambira ad­vises that you park the money in a no­tice de­posit or money mar­ket ac­count while you weigh your op­tions. You are more likely to over­spend if the money stays in your day-to-day ac­count.

Once the money is safely out of your reach, Ilse Smuts of FNB Sav­ings and In­vest­ments says that per­sonal pref­er­ence, risk ap­petite, min­i­mum­bal­ance re­quire­ments and f inan­cial needs all af­fect sav­ings and in­vest­ment

de­ci­sions. Be­low is a f ive-step plan to use as a start­ing point when de­cid­ing how to spend your wind­fall.

STEP ONE: STAY OUT OF JAIL

Be­fore you s pend a cent of your wind­fall, Mwan­di­ambira ad­vises you con­sider t he ta x i mpli­ca­tions. “The most ob­vi­ous cost of re­ceiv­ing a large amount of cash may be the tax im­pli­ca­tions of your sud­den riches. Be­fore go­ing on your spend­ing spree, con­sider i f the money is ta xable as in­come and make pro­vi­sion for this by set­ting aside tax,” he says.

If you’re not sure what t he ta x i mpl i c at i ons ar e , c onsu l t a ta x pro­fes­sional. It is a lot cheaper to pay an ex­pert up­front than it would be to f ind the tax you owe at the end of the year.

STEP TWO: DE­FEAT DEBT

Many South Africans strug­gle to f ind money in al­ready con­strained bud­gets to pay back debt. If you are in­debted, putting your wind­fall to­wards pay­ing off your debt should be your f i rst pri­or­ity.

Says So­nia du Plessis, CFP at Bren­thurst Wealth Man­age­ment: “Start by pay­ing off t he debt t hat has the high­est in­ter­est rate. If [ you have] no short-term debt such as shop cards, credit cards or pay­ing off a ve­hi­cle, pay­ing an ad­di­tional amount into a prop­erty bond can re­duce the to­tal amount paid for the prop­erty sig­nif­i­cantly and de­liver a good re­turn on the money, con­sid­er­ing the to­tal in­ter­est to be paid over the term of the loan.”

STEP THREE: EMER­GENCY EXIT

“If you are for­tu­nate enough not to carry debt, beef up your emer­gency fund,” Mwan­di­ambira rec­om­mends.

Emer­gency funds are cash re­serves to help you through dif­fi­cult fi­nan­cial pe­ri­ods or to cover un­ex­pected ex­penses.

STEP FOUR: SAVE OR IN­VEST

“You can use a por­tion of the money re­ceived to in­ject a lump sum into one of your ex­ist­ing ac­counts or you can spread it over your var­i­ous ac­counts in or­der to give your bal­ances a boost and reap re­wards that are aligned to your sav­ings and in­vest­ment goals,” Smuts says. The i nvest­ment op­tions you pur­sue de­pend largely on your unique f inan­cial sit­u­a­tion, ac­cord­ing to Du Plessis. She rec­om­mends con­sid­er­ing the fol­low­ing three fac­tors:

1. Your age, as it will de­ter­mine the in­vest­ment time hori­zon.

2. Your r i sk pro­file, which de­ter­mines what t ype of in­vest­ment is best suited to your needs.

3. Your per­sonal sit­u­a­tion. “The i nvest­ment de­ci­sion will be dif­fer­ent for mar­ried, di­vorced, sin­gle, young, mid­ca­reer or re­tired peo­ple. Each sit­u­a­tion de­mands a dif f er­ent ap­proach to in­vest­ment and sav­ings.”

STEP FIVE: TREAT YOUR­SELF Depend­ing on the size of your wind­fall, you might not be able to pay off your debt, bulk up your emer­gency fund and in­vest all

SHOULD GOOD FOR­TUNE BE­FALL YOU TO­DAY AND YOU DON’T YET HAVE A PLAN, PARK THE MONEY IN A NO­TICE DE­POSIT OR MONEY MAR­KET AC­COUNT WHILE YOU WEIGH YOUR OP­TIONS.

Gerald Mwan­di­ambira

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