It’s not just a matter of how much to put into savings and how much is available to spend, but unexpected aspects of money catch a lot of people off-guard when it’s too late for them to do anything about. Things like Inheritance Tax and ensuring one’s estate plan is up to date when the money comes in is often the last thing on people’s minds, so what other do’s and don’ts are there when it comes to getting extra cash?
Make a plan
As soon as one is aware that they should be expecting money they should plan for it.
Budgeting makes this easier but even simply looking at one’s debts and seeing which high-interest debts could be paid first is a good plan to begin with.
For people that don’t necessarily budget or have the best picture of their own financial state, it can be beneficial to put the money in a savings account until they have a plan.
Lottery, inheritance and selling expensive assets can see people get a lot of money really quickly (Image: GETTY)
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Find out the taxes
Depending on where and why the extra money is coming in, it could be subjected to a heavy amount of tax if one doesn’t know how to avoid these surplus charges.
If one has received a large amount of cash it is usually safe until a certain amount, likewise if the money value is in items and assets, capital gains tax allowance will let one get away with avoiding taxes until a certain point.
Aspects like inheritance tax also have to be taken into account so one doesn’t plan on using money that they wouldn’t end up getting.
If the money is of enough value it may be worth finding a tax or financial advisor specifically to help mitigate any unnecessary tax charges.
This should be the first focus of one’s extra money, although it doesn’t have to consume the entire amount.
Around 25 percent of the amount, or as much as can be spared, should go towards paying off these debts specifically, with low-interest debts forming a smaller portion of the extra money.
Emergency fund and savings
A vital and necessary expense on any level, when provided with a large sum of money it’s important to put at least three to six months’ income aside as an emergency fund.
It is vital to update one’s estate plan when their financial situation changes dramatically (Image: GETTY)
Generally speaking, around 10 percent of the amount should be put aside in other saving funds such as retirement or pension savings.
Think about investing
Simply put, investing is not for everyone but when one finds themselves in a newly enriched financial situation it can be product to use the money in a wise investment.
It’s important to remember that every investment comes with risk so if the money may be desperately needed it may be better to just keep it in a savings account.
Update your estate plan
When finances improve dramatically, it’s important to cater for the worst-case scenario.
Once one has decided how much of the money to allocate to expenses, savings, debts and investments, then it’s time to look at update one’s estate plan.
Inheritance Tax is already a big dilemma for most, but not updating your tax plan could see even more tax implications being imposed on an inheritance.