Congratulations, you’ve sold your house and settlement is just around the corner.
This means you may be lucky enough to be receiving a nice lump sum of money that will be rather sizeable (even after the real estate agent, solicitors and banks take their share).
It’s important NOT to view this money as some kind of ‘windfall’ that is ripe for the spending. Moments like this rarely come in life, thus it’s vitally important that you are wise with the money and do something wise to maintain it or grow it for future endeavours.
Here are some options on what you could potentially do with the money while you figure out your next steps.
1. Pay down some of your ‘bad debts’
Consider paying off any minor credit cards or personal loans that are costing you significant amounts of money in interest repayments.
- Unsecured personal loans, credit cards, car loans and the like can be costing you a tonne of money.
If you are carrying this kind of debt and forking out large amounts of interest, then it’s time to pay these debts off and more importantly; close the accounts.
Vow to never return to debt of this nature and as an added benefit, it will likely increase your borrowing power should you be wanting to purchase a different property.
2. Deposit the lump sum into a high interest savings account to ‘earn while you think’
Don’t feel rushed to decide what you need to do with this money. Consider putting the cash into a high interest savings account to earn cash while you think. Many banks and financial institutions will be willing to negotiate with you to give a better rate on sums over $100,000.
As a long-term investment, this method isn’t anything to get excited about but it’s good for the short term until you decide on what to spend the money on.
3. Lock the money away in a term deposit (for those who don’t trust themselves)
If you have no current plans for the money and can’t be trusted to not run into the nearest car dealership or travel agent – then lock the funds away in a term deposit ASAP.
Term deposits often give you better interest rates the longer you are willing to lock the funds away for. This can help remove temptation for many people.
Term deposits often have penalties for accessing the money early; this means you will sacrifice your interest if you wish to break the term – which is often a good deterrent for those who worry they may want to access the money for something frivolous.
4. Consider investing in shares for the long term
If you genuinely don’t have a need for the money, consider talking to a financial planner and investing in the share market.
A diverse portfolio of shares (including shares that pay dividends), could over the long term return far greater amounts of cash then a high interest savings account. I see investing in shares as ‘owning a small piece of a larger business’ and can be an exciting way to invest your money.
5. Buy a small business or start your own
Perhaps you have a solid business idea and want to back yourself. You could use a portion of the money to start your own business.
Given that most small businesses fail, you really don’t want to rush into this without a solid business plan or a tried and tested formula that is already in place and simply needing some capital to get it moving faster. Most of the worlds richest people got that way by running their own businesses, not working for others.
6. Use the lump sum of money towards your next house
Looking to purchase your next property? Perhaps planning to build a new property? Speak to a mortgage broker about your borrowing capacity now that you have a newly found inflated savings account.
Search for your new property and work out how much of a deposit is required. Make a call as to whether you wish to pay lenders mortgage insurance by boosting your deposit with the newly found funds from your previous sale. In some scenarios it makes sense to pay LMI if the reason for doing so is that you chose to repay other costly debts instead (per point #1).
7. Be very careful not to waste the funds on little luxuries and things you ‘think you need’
Most importantly when receiving a large sum of money, it is better to fail at investing it on property, shares or yourself then just let it slip through your fingers over time on living expenses!
Wait, educate, decide and then act on utilising the new funds. If you’ve been low on cash up until now it’s tempting to buy a new car, head overseas, quit your job and buy expensive clothes within a week of your property settlement, but you don’t want to regret spending this money later on.
If you really need to treat yourself, then set aside a small amount to spend on anything – a trip away, new clothes, a laptop, but only a small amount up to a maximum of 5-10% so you can use the bulk of your money to improve your financial future.