What’s The Best Thing To Do With A Lump Sum Of Cash?

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October 5-11th is financial planning week this year, and I thought I’d answer a question that came up in my community recently.

“What’s the best thing to do with a lump sum of cash?”

This is such a great question, and I think very timely for financial planning week!

So let’s say theoretically that you’ve been given a lump sum of cash – perhaps an inheritence or a tax refund. What do you do with it?! This very question alone can be totally paralysing. In the end, you either do nothing, or blow it all on a holiday of a lifetime.

But what if you could think about this logically, without emotion playing a role? It would be powerful stuff!

The Psychology Of Money

There’s a brilliant book I recommend you read called “Mind Over Money” by Claudia Hammond*. In this book she talks about all sorts of ways in which our mind play tricks on us and strategies to overcome it. It’s amazing how strongly we can feel about money, particularly when we associate it with a big event such as the death of a loved one.

I had this myself recently when my dad died. The last thing on my mind was that I’d be receiving any sort of money from him after death – I just assumed that it would all go to my mum. But then my mum rang one day and told me that I’d be receiving a lump of money from him as part of his life insurance pay out.

I was literally speechless, but my tears did the talking. Here I was, in receipt of a lump sum of cash – enough to clear all of debt, but I was paralysed. Somehow it seemed… wrong to spend it on debt – like he’d be disappointed that I did.

So it took me a while of procrastinating and going around in circles until finally one day my partner snapped me out of my “analysis paralysis” and I made a decision on what I would do with it. I teach this stuff and it was really really hard to overcome the emotion I had associated with this money.

So if you’ve come into some money, and feel paralysed with fear, don’t worry, you are completely normal.

What Could You Do With A Lump Sum Of Money?

So what did I end up doing with the money?

I put 20% towards my emergency fund (instantly bringing it up to 3 months worth of income) and 10% towards my wedding costs. I allocated 5% to investing, and the remainder I cleared debt, which didn’t pay it all off, but clear enough to manage what was left. It brought my 2020 goals 9 months ahead of schedule!!

I chose to do this based on my circumstances at the time because I didn’t have a huge amount in my savings at this point (having spent a lot of it on wedding costs and exam fees). So it made sense to stock up my emergency fund.

I also desperately wanted to clear more debt, so it was only natural for me to put the majority on this inspite of my initial worries.

The wedding was something that he would have been part of, so now it feels like he literally is – he’s helped to pay for a lot of it and that’s an amazing gift in itself!

So what could you do with a lump sum of money? If you’d like help with this, I offer free 15-minute strategy sessions to help you gain clarity on the next direction to take with your money!

Savings Goals

When you come into a lump sum of cash, keep emotion out of it – it’s just money. When you lump it together with other money you earn from your job or from a tax return, how do you know which £1 came from which lump?

You don’t!

So one of the things you can do is create instant savings ready for emergencies if/when they arise. Start with £1000, then increase to 3 months salary, then 6 months. How much you want to keep is entirely up to you and how comfortable you feel.

Then you have other savings goals like buying a house, a car or paying for a wedding. These are called “slush funds” because you will be using them sooner rather than later. You might also have a “garden and house” fund, a “clothing” fund and a “Christmas” fund – these are all areas that having a store of cash ready to go will come in handy.

Future Goals

Another thing to consider is allocating money to your future. A house forms part of this, but what about your pension? Do you have a work pension or do you work for yourself? If this is the case, then you must make sure you have provided for your future!

Start off a SIPP (self-invested personal pension), Stocks and Shares ISA or speak to a financial adviser to do it for you. Regardless, having money for your future is so important if you ever want to stop working one day!!

Have Some Fun

And finally, I advocate having some fun with the money – have a holiday, buy clothes, have a spa weekend, whatever fun looks like to you, go for it! I chose to spend my “fun” money on a wedding, but that’s because I regularly allocate money to fun for myself, and didn’t feel the need to use this money for it. But you might not have had a holiday for YEARS, and a much needed break or a trip of a lifetime is definitely needed.

Final Thoughts

It’s ultimately all about balance. Shoving it all in savings is great, but a little boring! Blowing it all on fun would be incredible, but doesn’t exactly help you in the long run. So have a smattering of options depending on where you’re at financially. You might need to pay off debt, but equally, having some money set aside for emergencies will stop you going back into it.

So think about your plans strategically, not emotionally and you’ll be just fine.

Until next time,

 

 

 

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steveark
20 days ago

I’m sorry you lost your dad. Money never makes up for something like that. In my case my mom and dad had been married about a week shy of 63 years when she died. He died a couple of years later of Parkinson’s and left their assets to my brother and me. When people ask what you’d do with a one million dollar windfall I never have to think about it because that’s exactly what happened, we each got one million in stocks, bonds and cash. That was about seven years ago. Both my brother and I left it alone… Read more »

Dr Cory S. Fawcett
20 days ago

Sorry for your loss. Congratulations on your upcoming wedding. I love your story. I get that question all the time and love to help people work through the answer. I’m adding this to Fawcett’s Favorites next Monday.
Dr. Cory S. Fawcett
Financial Success MD

Baby Boomer Super Saver

So sorry for the loss of your dad, Nikki! I lost my dad this year, too. Sad times. I’m sure your dad would have appreciated knowing that you used the insurance money to further your financial independence, too. Parents want their children to do well. Wishing you peace!

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