The thought of coming into a lump sum of money might be seem lovely for some and stressful for others. This could be because of an inheritance, lottery/premium bonds win, business sale, pension lump sum, work related bonus or something else.
Once the money hits the bank account there is an internal feeling of need to take quick action.
But regardless of how it came about, the steps that people should take are the same for all.
1. Give yourself some time
There is no need to rush into making big decisions, if anything taking a more measured approach is sensible in this instance. Some people they just need a few weeks, for others it may be several months. You can do this by moving the funds ‘out of sight, out of mind’ using deposit accounts and ensuring that you spread across multiple providers if required to remain within the Financial Service Compensation Scheme (FSCS) limits of £85,000 per person per institution.
2. Clear the decks
Pay off short term and unsecured credit such as personal loans or credits. This increases your financial security as well as improves your monthly cashflow by reducing fixed expenditure.
3. Top up the cash buffers
This might seem obvious but use this as an opportunity to top-up the cash reserves. Ideally you should have an ‘emergency fund’ of 3-6 months’ worth of expenditure plus some set aside for capital expenditure over the next 2 years. Being mindful of making your money work as hard as possible by shopping around and as well as being tax efficient with these funds are still important too.
4. Treat yourself
This can often be a slightly tricky one for people to navigate either because of emotional attachment relating to the source of capital or being unable to hold back from a significant capital purchase impulsively. For most people it is fine to have a little reward with a small proportion of the monies for some immediate enjoyment. I would encourage for this to be no more than 5% of the capital and preferably on an experience rather than an object/item.
5. Allocate accordingly
Once you have done the above it is time to start making some informed and intelligent decisions for your long term future to make best use of the capital in accordance with your own goals and wishes. Typical examples of things to consider here might be making gifts to loved ones, planned capital expenditure, paying down long term debt, tax efficient investments for your long term future. This is where you need may input from a professional adviser (such as myself) who can help advise you on what might be most suitable according to your personal circumstances.
So there you have it, a simple step by step framework on what to do!
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