In these tough financial times, a financial windfall from an estate is always welcome. The trouble, says Standard Bank, is that the more significant the amount received is, the greater the temptation it presents – after all, we wouldn’t be human if we didn’t regard a windfall as money we ‘never really had’ and so looked at spending it on something we really wanted.
But, points out Errol Meyer, Senior Manager Standard Bank Advisory Propositions, an unexpected sizeable inheritance should offer the recipient more than just a shiny new car parked in the driveway. It can, and should, provide an opportunity to add real, lasting value to your life and that of your family. He advises that there is never a better time for the head to rule the heart than when a large sum of money unexpectedly comes your way.
“The most important thing to do when a windfall occurs is to take a big breath, resist temptation and take time to make financial decisions. Putting the windfall in a bank account for a few weeks while you decide what to do, will give you time to come to terms with your new financial status and evaluate your options instead of making hasty or unwise decisions.”
“The second thing to consider is family and friends. As tempting as it is to share your new-found wealth, whether from a sense of duty or a sense of goodwill, these inclinations should be shelved-at least until you have had time to sort out your own plans.”
After taking the initial step of slowing things down is accomplished, Mr Meyer then advocates looking at your present financial position and taking the opportunity to get this right using the unexpected money. The things an inheritance can do to stabilise your finances include the ability to:
· Pay off existing debt. Personal debt is a drain on your resources. The more debt you have, the more interest you pay. In an environment of rising interest rates and costs brought about by everything from drought to the dropping value of the rand, paying off debt can help return you to financial health by restoring liquidity to your personal finances. “Paying off existing debt frees up the opportunity for you to build a brighter financial future by making investments”, says Mr Meyer.
· Pay off your bond. A home loan is a long-term debt that offers major benefits if it is paid off before time. Savings are achieved by not having to make monthly payments and through huge savings on interest costs. The rule is that the more time is left on the bond, the higher the savings achieved will be. “Having a home that is paid off means that a major asset is secured for the future. This can then be used to act as security when money is required – either through a loan on the property, access bond or for a personal loan,” continues Mr Meyer.
· Consider beginning a savings and retirement plan. Just where you should invest your money, and whether to opt for a retirement annuity to bolster your pension or provident fund pay out, are just two of the things to think about.
· Calling in a professional personal financial planner to assist. A good financial planner will consider your age, current financial position, where you wish to be in the long-term. He or she will then advise on a working financial plan to help you achieve your financial dreams. If your bond and debts have been paid off, then your new-found liquidity can be used to boost your investments.
A financial planner will assist you by:
Giving advice on savings and investments that are tax effective.
Advising on short, medium and long-term goals for building personal wealth.
Helping plan your estate so that even your children can benefit from your initial windfall.
Looking at the question of inheritances from another angle, Mr Meyer says that the person willing money to someone else is also a key player in the process of ensuring that inherited money is correctly allocated.
“A person planning their estate should be thinking about two things: the first being financial allocations to a surviving spouse. This should be viewed as a duty, as it is this person’s right to be first to be financially look after, even after the death of a spouse”.
“The second decision is to leave money to people who you think should benefit. These are people who should view any inheritance as a privilege.”
At this stage good advice from a financial planning professional could assist by:
· Helping to identify which heirs would be most likely to act responsibly with a windfall.
· Helping the testator, the person making the will, to identify ways of helping recipients who may not be as ‘money savvy’, to avoid squandering it. This could include advising on the establishment of a Trust led by a trustee who would administer and disperse funds so that they are preserved for the long-term.
· Advising on the implications of leaving money to someone who may be married in community of property – something that could impact on an inheritance.
· How to ensure that the person for whom the money is intended gets it and that it is properly invested, so that other people cannot persuade the recipient to part with their money.
“History is littered with examples of people who have inherited large sums of money, had a windfall or even won the lottery. The problem is that many of these same people, because they do not have ‘money skills’, spend all they have and are broke within months or a few years.”
“Knowing when receiving an inheritance that you are not financially literate enough to build a financial future and calling in a professional to help could be the best thing you ever do,” adds Mr Meyer.