How to manage a financial windfall

For most of us winning the national lottery is nothing but an out of reach dream, but imagine you were to win. What would you do with your winnings? And would you know how to deal with finances on such a large scale? Alina Hardcastle explores how to manage and invest liquid cash when encountering a windfall.

What is a financial windfall?

So, what exactly is a windfall? Nedbank informs us that it’s a lump sum of money received from a number of potential sources such as: inheritance, lottery prize money, provident fund withdrawal, tax refund bonus, gifts or a settlement.

Usually the nature of this occurrence is unexpected or unplanned, hence why it is so important to plan and consider how you will be spending or investing your money.

Seek assistance

Naturally, you’re going to want to invest or spend your money whether it is on property, a new vehicle, your children’s education, insurance policies etc. So, it would be advisable to seek help from a competent financial planner such as CFP (certified financial planner) professional, who will be able to give you the best advice to enable you to make the right decisions.

Ester Ochse, head channel of First National Bank (FNB) financial advisors says: “Many lotto winners or recipients of lump sum pay-outs fail to draw up a budget as they think the funds are endless. In some instances, these individuals fall prey to scams, suffer from instant gratification and spend on luxuries for themselves, extended family and friends. The biggest mistake they also make is not seeking the help of a professional adviser who can adopt a goal-based financial planning approach tailored to the individual’s needs.”

If you don’t already have a competent financial planner, you need to interview prospective financial planners and conduct background checks with their references. You will also need to confirm their accreditation with the relevant professional body.

Initial steps

Nedbank suggests placing your money into a notice deposit account or money market account temporally while considering what you intend to do, financially. In these accounts your money can earn interest and yet still be fully accessible.

Ochse adds that the first consideration you should take is to manage any debt that you may have.

Nedbank elaborates: “If you are fortunate enough not to carry debt, beef up your emergency fund which acts as a fund of last resort for emergencies. Most financial planning professionals recommend an emergency fund of at least six months’ income saved up for unforeseen expenses such as a retrenchment.”

Clear your mind

Once you have settled your tax, debt and put an emergency fund in place, it’s recommended that you spend a bit of cash on a simple pleasure i.e. a domestic holiday or affordable trip. Note that this simple pleasure should not be an extravagant luxury car or a global- one- year holiday.

“You must bear in mind that a windfall is often a one off occurrence that may not necessarily result in a lifestyle change, even if it seems like the amount of money is “impossible to spend in a lifetime”,” says Nedbank.

When you’re dealing with a very large sum of money, it’s important to take a step back and clear your head because the next financial decisions you need to make require a sober mind.

Have a plan

The key to your financial success in terms of managing your windfall is to plan. Nedbank says: “It is important to not invest this money directly into products or schemes – without having a holistic financial plan that reflects an understanding of your current financial situation, goals, risk appetite, knowledge of financial matters and expectation.”

You need to determine and define your financial goals and put a price on attaining them. You need to ask yourself has the windfall narrowed the gap of where you are and where you want to be; and is it enough to keep you going in the long-run?

Osche informs us that there are a number of investment vehicles available in the market which can be structured to suit an individual’s needs. A reputable financial adviser will need to consider the individual’s holistic goals and adopt an investment and long-term insurance plan to grow and safe-guard the funds.

She adds: “The investment approach will also be determined by the risk appetite of an individual. A financial adviser can also help with estate planning to ensure the individual’s legacy is protected.”

Family and friends

It’s wonderful to help out your family and friends when you come into good fortune. However, this giving, like everything else, needs to be planned and incorporated into a holistic financial plan.

“Many consumers deplete their funds as they pay for expenses incurred by family members or spend on luxuries to please others. The most effective and sustainable way of ensuring your loved ones are taken care of is to have a will in place to protect your legacy,” says Ochse.

It’s advised to try and keep your winnings as discreet as possible to avoid criminals and other opportunists.

If you would like to enquire about Nedbank savings and investment options, click here.

And if you would like to enquire about FNB’s offerings, click here.

To verify if a financial planner is a CFP designation or to find a CFP professional near you, click here.