What to do with an inheritance windfall

What to do with an inheritance windfall

Receiving an inheritance can be a great financial boon, but it can also be overwhelming when faced with the quandary of what to do with the money. Should you blow it all on a luxurious holiday, pay off the mortgage or invest it in shares?

The best option for you will depend on your age and goals, but no matter how old you are there is one requirement that remains the same: have a strategy on what you will do with the money.

Marc Bineham, director at Noall & Co and vice president of the Association of Financial Advisers says people without a plan are at risk of blowing it.

The age question

“Most people who receive an inheritance are usually older and fairly close to retirement,” Bineham said.

“If the average person passes away at 82 or 83, their children are going to be in their late 50s.”

For anyone in their 50s, Bineham recommends putting the entire inheritance straight into their superannuation fund. If you are 60 and above, this is even more beneficial because your super benefit payments will be tax-free. If, however, you still have a mortgage or other significant debt, “pay off the debt and put the balance into superannuation.”

“Having a mortgage hanging over your head when you want to retire is not a good thing,” Bineham advised.

RateCity Money Editor Sally Tindall said inheritors aged in their 20s, 30s and 40s, should think about paying off debt as one of the first ports of call.

“If you have any debt – particularly credit card debt – its worth thinking about wiping the slate clean as these cards can carry up to 21 per cent interest.

“Paying down the mortgage is also another good idea. Home loan interest rates might be at record lows right now, but they will go up over the course of your loan so the less you owe the bank, the better,” she said.

If you do not own your own home yet, the inheritance could be the perfect leg up to home ownership.

“There are plenty of advantages in getting into the property market early,” Bineham said.

For 20-somethings, Bineham recommends using 80 percent of the money to buy a home and saving 20 percent in a seperate high-interest savings account as an emergency fund.

“If you put all the money into a house, you are locking that money away,” he said.

“If you have an emergency and have to take time off work or decide to travel, you won’t have access to that money. Another option is to ensure you have a home loan with a drawdown facility, which gives you flexibility if you need the money.”

Plan before you act

Take some time to plan how you will invest your inheritance to ensure you make the most of it. A great thought-starter would be to consider your benefactors intentions; ask yourself what you think they would have wanted you to do with their valuable assets.  

If you want to have your cake and eat it too, a sensible equation is to save 20 percent of the inheritance for a rainy day, spend 30 percent on a splurge and use the remaining 50 percent towards your debt.  

“Working out how the money will be carved out is a really important step,” said Tindall. “Holidays are a great treat, particularly if you haven’t had one for a while, But before you go, take a moment to map out a holiday budget so you don’t blow it all in one go. A lot of people tend to stick to a plan better if its written down on paper,” she said.

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Learn more about savings accounts

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.