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What to do (and not do) with a cash windfall

I recently had a coaching session with a woman who is going through a divorce, she had reached out to me because she was expecting a cash windfall from the divorce settlement and she wanted to know that she would be making good financial decisions.

A cash windfall can come in different ways; winning the lotto, an insurance payout, an inheritance, a retrenchment package or a divorce settlement etc.

While we all wish to for a cash windfall that will change our financial lives for the better; without planning, the new few found fortune is no guarantee of a financially stress-free nor independent life!

It is estimated that 70% of people who win the lottery end up completely broke! This speaks to the truth about money; it is not about how much money you make but about the habits you build when it comes to money that will either break or make your finances. If you’re not disciplined, you will go broke. I don’t care how much money you have.

Depending on your marital contract, when the marriage dissolves, there are always financial implications. My client was married in community of property; this means that everything they owned and owed was split in half for them to share equally.

For my client, she was entitled to receive a payout from the ex-husband’s pension fund and she was also sitting with over a million in her bank account and she wanted to know what her options were.

  1. Keep your newfound cash windfall a secret

Instead of telling your family and friends about your lump sum, rather keep it to yourself until you have a plan of what you want to do first. Telling your family and friends will create unnecessary pressure on you to start dishing out money before you have a solid plan. And instead of giving handouts, give a hand up, i.e. paying for school fees.

  1. Do nothing (…at least until you have a plan!)

If you suddenly receive a lump sum into your account and you do not have a plan, the best option for you is to do nothing! Don’t go listening to people telling you how you can double your money in 6-months time and the like. This is not a time to gamble with your money. Until you meet an expert who can advice you, leave your money in a money market account where it can earn some interest and it still is safe.

  1. Catch-up with your retirement savings

When receiving a cash windfall, especially as a payout from a pension fund, you have to think about the huge tax implication. If you choose to receive the money in cash, the consequence is a huge tax bill. You are taxed on a sliding scale, the more money you withdraw, the more you get taxed. This is to discourage early cash withdrawals to combat the low rates of savings towards retirement (which I might add that most people don’t seem to understand)

2020 tax year (1 March 2019 – 29 February 2020) – No changes from last year

Taxable income (R)​ Rate of tax (R)​
0 – 25 000​ ​0%
​25 001 – 660 000 ​18% of taxable income above 25 000
​660 001 – 990 000 ​114 300 + 27% of taxable income above 660 000
​990 001 and above ​​203 400 + 36% of taxable income above 990 000

The advisable option is to transfer the funds into either a Preservation Fund or a Retirement Annuity. The transfer is tax-neutral and you will not get to pay any tax.

There is the benefit of course of topping-up your retirement savings but another advantage of transferring into a Preservation fund is that you are allowed one cash withdrawal should you ever need to (I don’t think it’s much of an advantage to withdraw from retirement savings but I know life happens!)

  1. Seek expert advice

A good financial planner can help you navigate the finance world and assist you in creating and executing a solid financial plan, however, you first need to find a good and ethical financial planner. Think of working with a financial planner as a partnership and not just someone you relinquish all your power to. This means that you have to educate yourself first!

Here are some tips on how to find the right ‘partner’:

  • Seek financial planners with reputable qualifications and experience – do they hold a CFP (Certified Financial Planner), how many years have they been in the industry, can they show you testimonials?
  • Understand the ‘type’ of financial adviser you are dealing with – are you looking for someone to advise you on insurance, retirement planning, wealth creation and preservation? Understand what their strengths are first.
  • Do you trust them? This is a big one! Listen to your intuition and seek a second opinion.
  1. Settle your debts

Due to high-interest rates, debt costs money. It is encouraged to pay off any debts you have so you can start to save and invest. The beauty of a cash windfall is that if it is a large enough lump sum, you can pay most if not all your debts at one go, but this does not solve the problem of how you got into debt; again we go back to money habits, because if you do not cultivate good financial habits with what you currently have, it is easy to repeat the same mistakes with a cash windfall and find yourself back to where you started: broke!

**This article first appeared in City Press

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