How should you invest a windfall?

By Staff Writer

At Justmoney we often offer advice on how to get out of sticky financial situations. But we also realise that good things can happen, so on this occasion we are writing about what to do should you suddenly find yourself with an unexpected lump of cash. Maybe you’ve won the lotto? Or perhaps old Aunt Mildred left you with R1 million when she passed on?

However you may have won your windfall, there are things you should consider once you’ve finished dancing for joy to ensure that your money lasts and doesn’t get blown all at once. The odds of keeping your money are not in your favour. “In the first five years lotto winners become bankrupt. The problem is that [windfall winners] think they are invincible and become generous with relatives and friends that suddenly pop up and ask to borrow money,” says Jason Garner, management consultant, of Acsis.

1.    Create a budget
Yes you’ve come into money, but it’s a good exercise at this point to take stock of what you’ve got and what your liabilities are. “Understand your income and expenditure, find out what you need to save for and get some financial advice,” says a spokesperson from Old Mutual. “If you don’t understand finance you could do a money management course. There are a range of them that you can attend but at Old Mutual we have one called ‘On the Money’".

2.    Pay off your debts
“As with all savings and investments – you need to pay down your debt first. So look to paying off home loans, store cards and outstanding balances on credit cards first,” advises Candice Paine, head of Sanlam Investment Management (SIM) Retail.

3.    Think like a millionaire
Paul Roelofse, consumer advocate for The Financial Planning Institute of South Africa and a certified financial planner says that if you want to be a millionaire, you have to think like one. “Don’t just resign from your job and find reasons to spend the money. Make the money work for you. Do take a percentage of it and spoil yourself but after that take the rest and invest it with the goal of achieving financial independence.”

Roelofse adds that you should speak to a financial advisor if you don’t know what to do with the money. “And ask yourself: ‘What are my needs for the short, medium and long term and plan your finances around your findings.”

4.    Make provision for your future liabilities
Once you’ve paid off your debt you need to take account of your future liabilities. “Once those are taken care of you always need to look to your future liabilities or needs and make provision for those. So for example, if you have children, education is always paramount and expensive. Bear in mind that education inflation is much higher than CPI – more in the order of 9%. So I would suggest that one makes special provision for educational savings by looking at investment vehicles viz. unit trusts which look at outperforming CPI by about 3-4%. Here you would need funds that focused on asset allocation while taking very good care of downside risks. This sort of thinking should be taken through any other future liabilities you may have,” advises Paine.

5.    Invest your winnings wisely
“Don’t make any rash financial decisions or quit your job immediately,” says Garner. “If you win R20 million it won’t necessarily last you for the rest of your life. Only give a small percentage away to relations if you wish and go get some advice on how to invest your money.”

Sinenhlanhla Nzama, investment product manager at Old Mutual, says there are a variety of products that you can choose from. “If you want to protect your money you could consider smoothed bonus funds. It’s a balanced fund with equities and property exposure with some protection from volatility built in. If you want to take on more risk you could invest in balanced funds or anything with more exposure to equities. Just remember that equity funds could drop significantly within a week or even increase significantly. You need to have a long term view. You also need to speak to a tax advisor as some of these funds could push you into a different tax bracket,” he says.

6.    Be careful of scams
Most commentators say that when it comes to an investment proposal that sounds too good to be true, then it generally is. Marius Fenwick, chief operating officer of Mazars Financial Services says that most failed cases result from promises of super returns with ‘guaranteed protection’. “Always ask about who is offering the guarantees. If the guarantor is a big bank or financial institution then it’s generally fine,” advises Fenwick.

7.    Don’t just look at past performance
When you come across a fund or fund manager that has produced stellar returns over the last year or two the temptation to invest is always great. But Fenwick heeds against looking at past performance. “Everyone looks at past performance but that’s not something you should do now. You have to consider interest rates, valuations and the economic situation you find yourself in,” says Fenwick.

If you’ve won mega millions, chances are you will be unsure about what to do with the money over the long term. They key is not to splurge it all but to invest it wisely for your future as well as for your family and to surround yourself with experts that can help you make the most of your fortune.

So when it comes to seeking help make sure you choose the right lawyer, financial advisor or tax expert. “Make sure that the financial advisor you choose is qualified and has at least five years experience. Ask about the fees they charge and about any termination fees associated with the investment product they recommend,” advises Garner.

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