If you receive a divorce settlement, an inheritance or another lump sum of money you need to carefully plan what to do with the money. Unless you are very financially stable and debt free, spending most of the money on a holiday or a new car is not the most sensible use of the money – instead use the money to improve your financial security.
Firstly, take stock of your current finances. Consider what debt you have, how much savings you have, and any essential purchases that need to be made?
You should apply the money to the most important items:
- Expensive debt – this is debt incurring high rates of interest such as credit cards and car or personal loans;
- Mortgage – are your payments up to date? Can you make any extra payments on your mortgage? Some banks don't allow this, or allow them only to a capped amount, so check with your bank;
- Essential purchases – such as school uniforms or new tyres – consider if there are any urgent purchases that need to happen soon;
- Superannuation – use the Superannuation Calculator at the MoneySmart website. Do you have enough superannuation?
- Savings – make sure you have enough on hand for any unexpected emergencies that might occur. Most recommendations are for a balance of about approximately three months salary;
- Treat yourself – if there is any money remaining after these essentials, use some to treat yourself. A small holiday or a fancy dinner – but don't consider these regular activities as they can soon drain your pocket.
If you are receiving any payments from Centrelink, it is important that you let them know you have received a sum of money. Failure to do so could result in a Centrelink debt.