Co-author: Dhayana Sena
Coming into a big sum of money may seem like the perfect problem but, if you have ever received a windfall of money, you may have found yourself nervous about the big sense of responsibility, or scared that you will do the wrong thing with it.
But it isn’t actually that complicated.
Whether your windfall is from a tax refund, inheritance, or a bonus, here are four ways to wisely manage your new funds.
1. Pay off personal debt
Kiwis pay a significant amount on interest each year when it comes to credit card debt. So, if you owe anything on your credit card then paying it off should be one of your top priorities. Putting your extra money towards your debt will reduce your financial stress and get you on track to being debt free.
You may also choose to use this extra money to pay down your mortgage or any personal loans. By paying off your debts, you will save money by paying less in interest.
Learn more about your credit card interest rate here. If you do use a credit card, but know that you regularly only make the minimum repayments, it might also be time to consider whether there is a credit card more suited to your needs, such as a low interest rate credit card. To compare the credit cards available on the market, use Canstar’s free credit card comparison tools.
2. Create an emergency fund
Do you have any savings for emergencies? If not, then this should be a priority. Ideally, you will want to build up enough savings to cover 3-6 months of expenses, to cover your rent or mortgage, groceries and electricity, in case you are ever between jobs for that long. You may even choose to put aside enough to cover 6-12 months. This may seem like a lot of money, so try starting with $1,000 in the bank to cover routine emergencies – like car repairs – and then build up from there.
3. Put aside some money for retirement
Are you on track for retirement? If you are not sure, then it is a good idea to chat to a financial planner to help you project your retirement income, or checking in with your KiwiSaver provider. Not yet registered? Have a read of why joining KiwiSaver is well worth your while! If you need to save more for retirement, consider using your bonus, tax refund or inheritance money to contribute to your Kiwisaver fund. Extra contributions can really boost the amount you will retire on.
4.Put it in a high-interest savings account
While you are choosing what to do with the extra money, why not make it grow in a high-interest savings account? Interest rates are low at the moment but, if you put a $4,000 tax refund into a high-interest savings account that earns 3%, in 5 years’ time (taking into account compound interest), it will grow to $4,637.
What is compound interest?
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. In essence, compound interest is interest earned on money that was previously earned as interest. This cycle leads to increasing interest and account balances at an increasing rate.
Why choose a high-interest savings account?
A high-interest savings account offers a higher yield and greater earning potential. Keeping your savings in a high-interest savings account can help your savings grow, while keeping the money safe from risks that can come with investing.
Typically, people use high-interest savings accounts to keep an eye of separate savings goals, curb their impulsive spending habits, and grow their savings under risk-free circumstances.
Use Canstar’s savings accounts comparisons, to find the right savings account to best suit your needs.
Lastly, make sure you also have a little fun with your windfall and allow yourself to celebrate. Make a reservation at a nice restaurant, book a holiday or buy yourself a nice gift. When we say use your money wisely, that can also include using some to treat yourself every now and again!