Receiving a financial windfall can leave most of us in a pickle on what to do with the money.
Should it go into super, or towards paying down the home loan, or should we save it to pay for the kids' education?
![Ride to riches: a windfall can be the basis for wealth creation, if you don't fritter it away.](/web/20170425054433im_/http://www.smh.com.au/content/dam/images/g/v/r/8/l/m/image.related.articleLeadwide.620x349.gvob5v.png/1493016962204.jpg)
Financial windfalls could be inheritances, death benefits from a super fund, a gift, work bonuses or even a win at the races.
However, a redundancy payment should be seen as in a different category to other windfalls, says Jonathan Philpot, a partner at HLB Mann Judd Wealth Management NSW.
![Receiving a windfall can leave us confused about how to make best use of the money.](/web/20170425054433im_/http://www.smh.com.au/content/dam/images/z/s/a/l/i/image.related.articleLeadwide.620x349.gvob5v.png/1493016962204.jpg)
That's because the redundancy may have to be your income, if you don't find another job, and you will need to save or invest it a lot more conservatively as it needs to be available.
Also be aware that financial or tax advice may be needed as the tax status of windfalls can differ.
Wealth builder
Leonie Fitzgerald, a 42-year-old wealth coach from Brisbane with her own business, Wealthology Australia, received an insurance payment after a car accident when she was 11 years old.
The money was held for her in trust until she was 18 and, on the advice of her father, she used the money to buy an investment property in regional Queensland with a family friend.
![Leonie Fitzgerald invested an insurance payout to build her wealth.](/web/20170425054433im_/http://www.smh.com.au/content/dam/images/g/v/p/g/a/t/image.related.articleLeadNarrow.300x0.gvob5v.png/1493016962204.jpg)
The value of the house doubled over the next 12 years, after which time the house was sold and she used the proceeds to renovate her house in London where she was living at the time.
When she had the Queensland house she did not save the rent but spent it, particularly on travel.
"It was my dad who wanted me to buy property," Leonie says. "He was concerned that I might just spend it and was worried about my financial future," she says.
Leonie used that first investment property to build her wealth. She owns several investment properties.
Laura Menschik, a financial planner and director of WLM Financial Services, warns against broadcasting that you have come into some money to extended family, friends and colleagues.
"If it's a large windfall you don't want to go broadcasting that to everyone," Menschik says.
"You have to protect yourself and not be too verbal about it," she says. Otherwise, there can be requests for loans and gifts and other uses for the money that may not be in your best interests, she says.
Don't blow it
While it can be tempting to use the money on renovating the bathroom or going on an overseas trip, there are many things that can be done with it to set up a better financial future. But that doesn't mean you can't treat yourself.
"If it is $50,000 you could maybe reward yourself with $5000 or so and do something with the rest of the money that is going to be worthwhile in terms of your financial future," Menschik says.
"You could park it away in a term deposit for three months and use the time to think about it and go and seek financial advice on what is the best way to use the money because you may never get a windfall again," she says.
Knock-off mortgage
Many of us have a substantial home loan and the windfall could be put towards paying down the mortgage debt.
Philpot says those with mortgage debt that is greater than half of the value of the house, in particular, should be looking to accelerate the repayment of the mortgage. He says it is important to be debt-free by retirement.
Leonard Gennusa, a financial planner with Fitzpatricks Private Wealth, is a also a "big advocate" of putting a windfall into the mortgage.
"Any opportunity to pay down the mortgage is going to help and it is good psychologically and frees up future cash flow," he says.
Mark Borg, a senior financial planner with MBA Financial Strategists, says the windfall could be put into an offset account attached to the mortgage. That way, the interest paid on the mortgage is reduced and the money is still available to be withdrawn if needed.
The offset account can also be a good place to save for your kids' education, Borg says.
It is like earning interest equal to the mortgage interest rate without the need to declare any interest income from the offset account in the tax return.
Borg generally prefers an offset account to education scholarship funds as parents retain total flexibility over the use of the money.
Spend on home
Planners say that while it is tempting to use the money to improve the family home, you must be clear that it is likely to be a "lifestyle" spend rather than an investment.
Borg says improving lifestyle is not a "bad thing" to do as long as you are not "kidding yourself that you are increasing your wealth, because often you're not," he says.
In big cities it's land value that goes up rather than the value of the house that is built on the land, he says.
Gennusa says you could spend $50,000 putting in a swimming pool as long as you are aware that when selling the house there are plenty of potential buyers who don't want a pool.
Retirement savings
From July 1, the superannuation contribution caps are not as generous, but super remains the preferred way for most people to save for their retirement.
Philpot says that from July 1 you can make up to $100,000 non-concessional contributions to super a year or up to $300,000 in any three-year period. Restrictions apply to people with high balances.
These contributions don't attract any concessional tax breaks on the way in, but once in super, and still working, earnings are taxed at only 15 per cent.
The concessional cap from July 1 becomes $25,000 for everyone and includes the 9.5 per cent compulsory super.
From July 1, the concessional contributions will be open to all sources of money, not just through sacrificing salary.
Philpot says someone with a $50,000 windfall could put a portion of that money, up to the cap, into their super as a personal concessional contribution.
The balance could be put in as a non-concessional contribution.
Alternatively, $50,000 could be put into super as concessional contributions up to the annual cap over several years.
And, from July 1, 2018 those with super account balances of less than $500,000 will be able to pool the $25,000 annual cap for up to five years meaning that up to $125,000, less compulsory super, could be put into super in one year.
Philpot says the decision on whether to put to money to into the mortgage or super will likely, among other things, depend on age.
Those under 50 tend to be reluctant to put extra into super as they have to wait longer than older people to access their super, he says.
However, being able to make personal contributions into super and claim a tax deduction will likely see more younger people using super to reduce their personal income tax, Philpot says.
Caution on property
With property prices booming in Sydney and Melbourne, planners say that would-be property investors have to be very careful.
Gennusa says: "It's hard to predict but given the rapid rise in prices you think we would have to be near the top.
"Be particularly careful of apartments in Melbourne where there's a lot of supply coming on," he says.
"However, someone with a 10-year investment horizon will see growth in prices," Gennusa says.
"But investing for the short-term and trying to time the market is fraught with danger," he says.
He points out that just as borrowing to invest magnifies the capital gains it also magnifies any losses.
Shares
Philpot says with an investment like a portfolio of shares it is important to put it into the name of the lower-income earner who will pay less tax on the investment earnings and capital gains.
However, it can be better to have the investment in joint names for those in their mid-50s and over as they are nearing retirement when they will be on a low rate of tax or pay no tax.
And before investing the money on the sharemarket or putting it anywhere else, everyone should make sure that they have their credit debt paid off.
Gennusa says the general rule is to pay off credit card debt first, as they can have interest rates of more than 20 per cent, and then any other non-tax deductible loans, such personal loans and the mortgage.