BUSINESS NEWS - You may be among those lucky enough to get a sizeable tax rebate, a generous inheritance or a bonus or commission. Whatever your situation, whenever there is a sizeable influx of cash (larger than- or in great excess of your regular monthly income), it can be tricky to decide how to spend it sensibly, while also making the most of the opportunity it presents.
Put it in writing
When considering how to optimise any financial windfall, a good starting point is to have a written statement of your income and expenses. It’s also important to write down any debt you’re paying off, noting the total amount, as well as any savings or investment goals you might have.
A budget gives you a realistic view of your current financial position and enables you to monitor your finances, ensuring you do not become financially over-extended. This allows you to truly assess where extra money might be needed or could be applied to make provision for the future.
The basics should be in place
If you have debt, it’s recommended to first address this area with any extra funds to reduce what you owe. Credit cards typically charge the highest interest rates, so it is advisable to keep exposure to this type of debt to a minimum. A reduction in monthly debt repayments will increase your disposable income and ensure you save a substantial amount of money on interest repayments, so it can be worthwhile taking the knock of using a large chunk of money to reduce the overall amount you owe.
You should also have an emergency fund equivalent to 3-6 months’ worth of your salary (ideally, your gross salary) to make provision for the unforeseen, and to prevent you from having to incur debt in the future to cover unplanned expenses.
Extra funds can really help get a head start on this if your emergency savings are lacking.
If you do not have any debt and you already have an emergency fund, you might consider investing the full amount as a lump sum contribution into your retirement annuity since contributions up to a maximum of 27.5% of the value of your remuneration or taxable income (whichever is higher) can be deducted from your annual income up to a maximum of R350, 000 per year.
An expensive purchase
If you have excess funds, you might be considering taking on an expensive purchase such as buying a new car. Perhaps you’ll have enough money to buy a car cash, or at least make a sizeable deposit, or your windfall has allowed for other expenses to be omitted from your budget, making monthly repayments on a new car seem more manageable.
Whatever your situation, whenever there is a sizeable influx of cash (larger than- or in great excess of your regular monthly income), it can be tricky to decide how to spend it sensibly, while also making the most of the opportunity it presents.
Be sure, however, to make provision for an increase in your car insurance and pay careful attention to special clauses such as balloon or residual payments that might become due at the end of the finance term. If you’re considering other large purchases, make sure all payment terms and conditions have been weighed up as well.
Go the distance
It is important to take a holistic view on what the most effective way would be for you to deploy capital with due consideration to your current financial position.
There are plenty of ways that money can be spent, but if you’re at a loss as to how to put it to good use, rather chat to your financial adviser regarding a suitable solution because a pressure to spend or a sense of ‘carpe diem’ could end up in buyer’s remorse, especially since you don’t know when your next windfall might come around.
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