If you receive a divorce settlement, an inheritance or another lump sum of money you need to carefully plan what to do with the money. Unless you are very financially stable and debt free, spending most of the money on a holiday or a new car is not the most sensible use of the money – instead first use the money to improve your financial security.
Take stock of your current finances. Consider what debt you have, how much you have in savings, and any essential purchases that need to be made. If you have a financial advisor, you might like to seek their advice.
You should apply the money to the most important items:
- Expensive debt – this is debt incurring high rates of interest such as credit cards and personal loans. Many creditors are open to a reduced offer of settlement (especially for overdue debt), where they will accept a lump sum that is less than the total amount you would have paid if you paid in instalments;
- Savings – make sure you have enough on hand for any unexpected emergencies that might occur. This might be your fridge breaking, your car radiator dying, or having to travel to see a sick family member. A good minimum is three month's of living expenses, but if you have unstable work or inconsistent income, having saved six month’s of living expenses can be a real safe haven;
- Essential purchases – such as school uniforms or new tyres – consider if there are any urgent purchases that need to happen soon. It might be a great opportunity to replace an old appliance with one that is more energy efficient;
- Mortgage – are your payments up to date? Can you make any extra payments on your mortgage? Some banks don't allow this, or allow them only to a capped amount, so check with your bank;
- Superannuation – use the Superannuation Calculator at the MoneySmart website. Do you have enough superannuation? Be mindful that choosing to put lump sums into your superannuation means you can’t usually access it until retirement age;
- Treat yourself – if there is any money remaining after these essentials, use some to treat yourself. A holiday or a nice dinner – but be aware that adding these as regular activities can soon drain your pocket.
What is most important to you might be in a different order to this list, and that’s okay. The main thing is that you make a plan for the money so it doesn’t just disappear over time.
If you are receiving any payments from Centrelink, it is important that you let them know you have received a sum of money. Failure to do so could result in a Centrelink debt.
[Article updated 1/12/21]