What Should You Do with An Unexpected Lump Sum?

It’s not unusual to daydream about an unexpected windfall. Whether it's a lottery win or an inheritance from a long-lost relative, we all have ideas about how we would spend the extra money.

25th July 2024
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But taking a little time to plan means the money can be enjoyed longer. A new car or a holiday might improve your immediate lifestyle, but they probably won’t help you achieve your long-term goals.

Types of Lump Sum
Your priorities for your lump sum will depend on the amount and where the money came from. For example:

After you have covered some immediate costs and potentially a few treats, you should start thinking longer term.

1. Keep Some Cash in the Bank
Building up a cash reserve is not an exciting use of the money, but it should be a high priority. You should aim to keep at least 3-6 months’ worth of essential expenses in a savings account, separate from the money you dip into regularly. This has the following benefits:

While you will undoubtedly dip into your reserves at some point, it is worth topping this up as cash flow allows.

2. Repay Debt
Some debt is useful. For example, if your mortgage is on a low interest rate, you may feel investing the money is more worthwhile than clearing the debt. This will depend on your circumstances and how you feel about the risks of investing versus the certainty of repayment.

Other debts are usually more expensive and should be repaid as soon as possible. Not only are you paying interest, but there is also an opportunity cost. Your monthly repayments could be invested elsewhere and earning growth.

Remember, your circumstances can change at any time. Clearing debt not only reduces your outgoings but also your vulnerability if things go wrong.

3. Top Up Your Pension
A pension is an extremely tax-efficient investment. Investing in a pension has the following benefits:

However, there are certain caveats to be aware of:

4. Invest for the Future
If your pension is fully funded, or you want to be able to access your funds earlier, you may wish to consider other investment types. The main options are:

The best investment option will depend on your circumstances and how you plan to use the money.

5. Provide for the Next Generation
With your own goals fully funded, you may be thinking about how best to provide for your family. You have a number of options:

Whatever your goals, a clear plan can help you make the most of your windfall and ensure that the money works for you.

Please do not hesitate to contact a member of the team to find out more about how to deal with an unexpected lump sum.

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