by Leon Jones
Receiving a financial windfall or inheritance can be overwhelming, but it doesn’t have to be. This guide will help you navigate the complexities and make informed decisions to secure your financial future.
- Get Professional Help
Why It Matters: Financial advisers, accountants, and lawyers can offer invaluable assistance. In Australia, it’s crucial to ensure your advisers are familiar with local laws and regulations. A team of experts can guide you through asset management, tax strategies, and estate planning, helping you make the most of your new wealth.
Tip: While you should assemble a team you trust, remember that you are in charge. Stay involved in every decision to ensure your goals and values are met.
- Determine Your Tax Situation
Why It Matters: Assess the tax implications of your new wealth, including capital gains tax and other potential liabilities. Proper tax planning can save you significant amounts. For instance, selling an inherited property can have substantial tax consequences. Understanding your tax situation helps you plan effectively and know exactly how much money you’ll have after taxes.
Tip: Work with tax professionals to develop strategies that minimise your tax burden and align with your investment and lifestyle goals.
- Be Aware of Capital Gains Tax
Why It Matters: Assets acquired from an estate can be subject to capital gains tax. For example, if you inherit a property and decide to sell it, the profit from the sale may be taxable. Understanding these implications is crucial to avoid unexpected tax bills.
Example: If your father bought a house for $200,000 and its value increased to $250,000 when you inherited it, the capital gain would be the difference between the sale price and the value at inheritance. Seek professional advice to understand the tax ramifications before selling any assets.
- Treat Yourself – But Do It Conservatively
Why It Matters: It’s tempting to splurge, but setting a limit on your spending ensures you don’t squander your windfall. Decide what percentage of your inheritance you’re willing to spend on something special and stick to it.
Tip: Whether it’s 1%, 5%, or 10%, the key is to plan and manage your spending. For example, if you inherit $200,000, allocating 5% ($10,000) for fun can be a balanced approach. Always consider the tax implications before spending.
- Invest Your Money (Short-Term)
Why It Matters: Before making long-term plans, park your money in a safe, liquid account. Common choices include term deposits, commercial bills, bank bills, and cash investment trusts. This keeps your money accessible while you decide on long-term investments.
Example: If you receive $500,000, placing it in an account with a 2% annual yield can earn you approximately $5,000 in six months. This strategy ensures your money works for you while you plan your next steps.
- Sit Tight
Why It Matters: Sudden wealth can significantly change your life. Take the time to let the impact soak in and decide what role your new wealth will play in your life. Rushed decisions are often regretted.
Tip: Allow yourself time to think about your goals and how your new wealth can help achieve them. This step is about reflection and planning.
- Determine What Will Change – and What Needs to Change
Why It Matters: New wealth can affect various aspects of your financial and legal situation. It’s essential to understand how it impacts personal finance, insurance, housing, and legal matters.
Example: If you decide to buy a holiday house, consider the tax implications, whether to own it as an individual or in a trust, and how it fits into your estate plan. Ensure every financial move supports your broader goals.
- Pay Off Debt
Why It Matters: Using your new wealth to pay off high-interest debt is often the best course of action. It increases your cash flow, saves on interest payments, and improves your credit rating.
Tip: Prioritise high-interest debts like credit cards. For example, paying off a $3,000 credit card debt at 18% interest saves you over $1,600 in interest. For larger debts like mortgages, consider the benefits of paying extra versus maintaining flexibility.
- Create an Intermediate-Term Plan
Why It Matters: After addressing immediate concerns, focus on intermediate goals. Depending on the size of your windfall, consider options like purchasing a new home, going back to school, changing careers, or creating trusts for your children.
Example: If you invest a $200,000 windfall at a 5% pre-tax return, you can supplement your income and make significant life changes, such as transitioning to a more fulfilling career.
- Develop a Long-Term Plan
Why It Matters: Your short- and intermediate-term plans should align with your long-term goals. Whether planning for early retirement or setting up a sustainable lifestyle, having a clear vision helps you make informed decisions.
Tip: Start by defining your desired retirement lifestyle and calculate the costs. Use this information to determine how much you need to save. For example, if you aim for a $70,000 annual income in retirement, your nest egg should be around $1,000,000 assuming a 7% return. Regularly review and adjust your plan to stay on track.
Conclusion
Managing new wealth effectively involves careful planning and informed decision-making. By following these steps, you can protect and grow your inheritance, ensuring it supports your financial goals and long-term aspirations. Take your time, seek professional advice, and make sure ‘easy come’ doesn’t turn into ‘easy go’.
If you need personalised advice, I’m a financial planner in Maitland, NSW helping clients in Newcastle and the Hunter Region. Book a consultation with us today to help you achieve financial freedom and secure your future.
Before acting on any information contained herein you should consider if it is suitable for you. You should also consider consulting a suitably qualified financial, tax and/or legal adviser. Information in this article is no substitute for professional financial advice. We encourage you to seek professional financial advice before making any investment or financial decisions. In any circumstance, before investing in any financial product you should obtain and read a Product Disclosure Statement and consider whether it is appropriate for your objectives, situation and needs.