How to protect a windfall
02 November 2016
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On mobile, on digital, on demand, this is Old Mutual Live, Money Coach. Hello and welcome, my name is Chris Gibbons. Just a couple of months to go now in 2016 and for many people year-end means that it’s time for a 13th cheque or some kind of bonus or even profit-share, excellent!
It’s a process that I know from personal experience can often bring some much needed financial relief. But it can also be one of those that disappears like a summer thunderstorm, lots of noise and flashing lights and then it’s gone. How should you protect your windfall, how do you resist the temptation to splurge?
We’re joined now by Old Mutual’s Head of Financial Education, John Manyike. John, welcome, good to talk to you again. For many people it’s a case of paying down some debts and then splurging what’s left on a party or two and some gifts. But that I would imagine is not the way to go?
John Manyike: True, there’s more to it. Chris, there’s an old proverb that says: It’s easier to earn money than to keep it and I think it’s true for many of us. When suddenly a bank account is hit by more digits than we’re used to, it tends to create a bit of excitement and sometimes we lose it. We go on a spending spree and by the time we finish spending the money, we look back and we realise that actually we haven’t achieved much with that money.
CG: When I say a ‘windfall’ I think of a Christmas bonus, but of course there are other kinds of windfalls too.
JM: Absolutely, in a South African context we have stovels. You would find a lot of them actually cash in round about that period where they share money amongst themselves.
Others it could be the grocery schemes, all of a sudden they’re able to access that money which they buy groceries in bulk. It could also be an inheritance, which could happen at any time of the year. It could be an annual bonus or maybe for those who are lucky, it could be winning the Lotto.
You need to ring-fence your windfall
CG: I’d certainly take that one, I’d like to win the Lotto! What are your main tips then John, to protect the windfall?
JM: Before we talk about the tips, I want to highlight one of the most critical things that needs to happen before one even begins to look at a plan. Is that we all need to have a financial goal of some sorts and that is translated into goals and actions. To be able to achieve it at any given time, whether there’s a lump sum, a cash windfall that comes in or not, that always needs to be intact. So that when you now have money that you didn’t expect, it’s easier then to execute the plan that you’ve always had or even enhance on the plans that you’ve had.
Let’s get to the tips as you’ve suggested. The first thing is, when you get a cash windfall, you need to ring-fence that windfall. The biggest challenge for many people is excitement. Firstly, you need to give yourself time for the excitement to settle. So you can be rational and have logical decisions on how best to make your newly acquired lump sum work in your favour.
It’s very important that you allow that excitement to settle and by ring-fencing the windfall. Because the temptation would be, let me go out and spoil myself while I think about how to spend the money. By doing that you’re already spending your money. So that’s the first tip, ring-fence your windfall and allow the excitement to settle.
CG: Got it and the next one?
Create a money moratorium
JM: The next one is you need to create a money moratorium. Until such time that you’re clear in your mind how you’re going to be spending the money. What are the things you’re going to prioritise? You need to make sure that you put a hold on spending of that money. It can be easy to spend money that you weren’t expecting to have or that you weren’t budging for, especially in the case of a windfall. Create that moratorium until you’re clear in your mind, that’s the second one.
CG: Number three?
JM: Then you need to see the windfall as a seed. You need to see it as a capital to be able to fund your goal or your vision and so on. When you receive your windfall, you should consider it as such because it can potentially grow into a large tree if you see it as a seed.
That would definitely be a good thing to look at it because then it could be a seed to achieve. Maybe you wanted to buy a new house or you wanted to do alterations in the house or maybe you want to invest that money for a particular reason. But see that as a seed for something to enable what you’ve always wanted to achieve.
CG: What else do you have?
Life is a marathon not a sprint
JM: Number four is that you need to recognise that a life is a marathon, not a 100m sprint. Why I’m saying this is that sometimes we tend to live for the now, we focus on the instant gratification. But if you see life as a marathon, you’ll understand that even when I get a cash windfall now. I’m in it for the long haul, that’s very important.
Then number five is that you need to prioritise your debts. If you want to live a debt-free life, when you receive a cash windfall, one of the key things that you need to be looking at is what is the most expensive debt that I need to kill. Because the minute you’ve killed that debt, then you’re financially free, you can focus on other things. You can start breathing and living a normal life, very critical.
Then of course last, but not least, which is number six is that you need to speak to a financial advisor. They can help and save you a lot of time, time for research and other things. Because they’ll help you explore all the different options because there’s a universe of products out there. But these are pros and cons, so you need an expert to be able to give you advice on that.
As you do that, make sure that you also financially educate yourself so that you can have a clear definition of what your goals are. What your current position is, what your planning horizon is over the next couple of years or so. But also what your risk profile is and understanding what your appetite to risk would be. Those are the tips that we’d like to offer today.
Give most expensive debt priority
CG: Very sound advice there, John. Let me just go back to the question of debt. A lot of people would say: I use my Christmas bonus, I’m talking specifically about the Christmas bonus here, to pay off the debts that I’ve racked up during the year. It’s been a tough year and I use the bonus to clear the debts. Are you saying they shouldn’t do that?
JM: No, definitely they should, that’s why I mentioned, I think it was number 5. That you need to prioritise your most expensive debt, that’s very critical. If you want to be financially free or be debt-free, make sure you do that. Obviously that can be coupled with other things and including some of the other tips that we’ve mentioned. But especially if you’re talking about the festive season in particular.
It’s very critical that when we actually do a budget for December. We remember that there is January. Prioritise your school uniform, your stationery for your kids, for those who have children and so on. But also for those people who are earning the salary early in December. Because you do find people earning in the middle of December, which makes January a six-week month. That’s why a lot of people struggle with their budget in January, because of lack of planning in that particular season.
CG: Of course, as we all know, once the party clothes go on, when the cash runs out, we just grab the credit cards and the cycle begins all over again.
CG: How do you resist that?
Apply these tips, avoid the credit card
JM: You see, it’s about application of all the different tips that we’ve shared today. You need to apply those things. Because if you don’t have a clear plan, if you don’t have a goal, it’s easy to just spend. Because you’re spending aimlessly, you’re not working within a particular plan or towards a particular goal. That’s why you need to be emotionally attached to your vision and to your plan.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. John, let’s just recap, what were those five key tips again?
JM: The first one we said you need to ring-fence your windfall. I’m not going to go into detail. Number two we said you need to create a moratorium on your windfall. Then number three we said you need to grow your purpose. In other words, see your windfall as a seed.
Number four we said you need to recognise that life is a marathon, you’re in it for the long haul. So don’t just spend for now, consider the future. Then we also said, number five, you need to pay your most expensive debts if you want to live a debt-free life. Number six we said you need to speak a financial advisor who will help you to plan better.
CG: John Manyike giving us good tips, key methods, protecting your windfall as we head into the festive season. This has been another edition of Old Mutual Live, Money Coach, my name is Chris Gibbons. John Manyike is Old Mutual’s Head of Financial Education. John, if anyone wants more information, more assistance, where would they go?
JM: You’re welcome to join our social media community on Facebook, which is On the Money Financial Education Programme or on Twitter which is, you know it better…
CG: That’s Twitter, remember, please feel free to get in touch any time if you have any questions for me or topics you’d like covered on Old Mutual Live Money Coach. Just send them direct to me at firstname.lastname@example.org, I’d be delighted to hear from you. Until the next time, thank you for listening, Old Mutual Live, on mobile, on digital, on demand.