The ultimate dream for many people would be the receipt of a large, maybe unexpected, sum of money. The thought of financial independence, coupled to the acquisition of a few luxury items or holidays, keeps the hopes of many people alive. However, whether it be an inheritance from a rich relative, a windfall from a wise decision on the stock market, or even a lucky guess at the races or casino, it is the management of this money that will determine your ultimate happiness.
Before deciding on how the money will be used, you need to determine what taxes are due. Many jurisdictions tax inheritances (see for example the American Estate tax , or the UK Inheritance tax ), some tax gambling winnings, and most tax stock market or business windfalls. It is advisable to get professional tax advice and put aside any tax due, as the receipt of a large tax demand once the money is spent or otherwise invested could be disastrous for many people. This tax money should be invested in a ‘safe’ investment such as a bank saving account to ensure no loss of capital before it is due.
The investment decision for the balance of the windfall depends largely on the current and desired lifestyle of the recipient. While a conservative approach may be beneficial to some people, a more policy could be better for some individuals. You must bear in mind that this money was unexpected: – some risks can be taken if your current lifestyle can be maintained.
Many people have a vague dream about starting their own business. However unless you had already carried through much of the planning for this possibility it is not recommended that a good, well-paying job be summarily abandoned. Rather put away the cash for a reasonable period – say 6 months – while you research and plan for this new opportunity.
Too many businesses die, and too much money is lost, when well-meaning people go into business without being fully aware of what they are doing. If however you had already completed all the groundwork and were just waiting for the banks (or other investors) to raise enough capital then now is probably the time to realize your dream. Even in this case it is advisable to keep out enough cash to live on for at least a year to two years. No business is profitable from day one, and you need to survive in the interim.
The rest of the money should be invested using standard good investment strategy. This often rests on three legs:-cash (immediate bank deposits), property and equity. In all three cases good investment advice is essential. You are looking for a good mix of capital growth – for your retirement, or a child’s education or other big event – and annual or monthly income to supplement or replace your own income. The reason for splitting up the money into three legs is quite simple: – banks can fail, property prices can fall and equities can decline. By splitting the money you hope to ride out any crash in one (or maybe two) of the three elements.
Extra cash may be a good time to buy a house for your family, or upgrade to a more suitable property or better neighborhood. A second property for rental could be considered. This could bring in an income while preserving your capital. Any tax and expense implications need to be researched first, and a good property adviser is necessary.
Similarly, extra cash could be invested on the equities market. Over time some equities rise (though the time may be longer than you are willing to invest). These investments could be in dividend paying shares for an annual income, or shares that pay no dividends and rely on capital growth. Once again specialist advice is necessary as share prices do fluctuate and it is stressful to see a large investment losing value on a daily basis!
In essence, common sense is needed. You have an opportunity to improve your lot in life. A bit of patience and thought cements that improvement while hasty decisions destroy the very opportunity.
The writer of this article is not a financial adviser. Specialized personal advice is needed before any major investment decisions are taken].