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How to handle windfalls

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What should you do if you’re lucky enough to come into a lot of money? Maybe the money might have come after a ‘shock’ bit of luck at the horse races or it could be a bigger ‘win’ such as an inheritance.

How would you handle such jackpots, and in particular how could you grow them?

Two important decisions 

If you have a decent amount to invest, you have two important jobs to do. The first is to work out what you want to do with it – goal-wise. Second, you have to determine how you’re going to make it happen – do-it-yourself or seek a professional such as a financial planner for investment issues and/or an accountant for tax-related matters. 

Do the homework or get help

There will be tax deductibility issues that should be considered in relation to your income. This is why it’s crucial to do the homework or to get an expert.

I came across a young guy I know who was finding it hard to buy a house where he wanted. I asked if he thought about buying it as an investment property using the tax system to help cover the interest bill? He hadn’t. He thought if he did, the place would attract capital gains tax but I said if he moved in before six years, it could be eliminated. He didn’t know that, and in that time, I pointed out, his income should rise and that could make the place more affordable.

I also suggested he make sure that the area he was looking at was good for rentals. You want a place with a low vacancy rate. 

Plan it! 

So for a big windfall, I reckon you need a plan. It starts with your goals and shows how you will get there. I often use 10 per cent per annum as an average return on good property, and shares over a 10-year period. This means you could gamble that your $100,000 could double around every seven years with adjustments for tax.

Of course if your adviser or your own DIY plan is better than the average, you could do even better! But this is easier said than done. 

Do the maths

If you’re in your 20s or 30s, just plonking the amount into your super or against your home loan can be good. The E-Choice website had a good example a couple years ago of a couple who wanted to pay off their 25-year, $100,000 home loan quickly but could not afford higher monthly repayments. Instead they decided to put one partner’s annual $2000 tax return straight into the loan. This strategy would cut the loan term by nine years and save almost $45,000 in interest – presuming seven per cent interest over the course of the loan.

Small amounts plus time can deliver rewarding results.

Back to school 

However, a great ‘investment’ of a small amount might be to do a self-improvement course. It could be a financial education course, a public speaking program, a training program or even a university program.

This small investment could double, triple or quadruple your earning capacity and deliver millions of dollars through work and investment over your lifetime in a job or a business you own.

It always starts with goals and happens when you put a plan into action!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, September 02, 2011

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