Farzana Botha, segment solutions manager at Sanlam Savings, said that people should pay off their debts first if they receive any financial windfall.
The financial windfall can be an inheritance, bonus, investment returns or money that has been won through a competition.
Botha said: “A windfall can be overwhelming, especially if its unexpected and as a result of losing a loved one. Regardless of how you have landed your newfound cash, you should take a week or two to apply to digest this new financial situation.”
If people pay off their debts then they create more disposable income that can be used for other things such as investing.
“Pay off debt with the highest interest rate first, such as loans and credit cards. The things that you are paying the most amount of interest on, are the things you need to squash as quickly as possible,” Botha said.
According to Botha, people put their money into an appreciating asset, such as a bond or an interest-bearing account where the funds will earn capital growth.
Cash windfalls can also be put towards emergency savings or an emergency fund that useful in the event of an unpredictable situation. People can use the money in the emergency fund rather than taking out any further debt like a loan.
Susan Steward, spokesperson for Budget Insurance, said that with the constant threat of events such as job losses, it’s recommended that people have three to six months’ worth of expenses saved up in their emergency fund.
“Start by saving a small amount each month. Commit - don’t withdraw anything from this fund unless it’s a crisis,” Steward said.
Botha said that when people have this unexpected cash they can protect themselves from future risks if they put aside some of the money.
“Advice is free. A financial advisor or a professional who is impartial can help you to make decisions when it comes to the best way to manage your money,” Botha said.
“A financial planner can also advise what the tax implications of an unexpected lump sum might entail.”
IOL Business