Est. read time: 2 min
If you receive a divorce settlement, an inheritance, or another lump sum you need to carefully plan what to do with the money so that it can be used to improve your financial security.
What to do when you receive financial settlements
Take stock of your current finances. Consider what debt you have, how much you have in savings and any essential purchases that you need. If you have a financial advisor, you might like to seek their advice.
You should apply the money to the most important items, for example:
- Expensive debt – debt incurring high-interest rates such as credit cards and personal loans. Many creditors are open to a reduced offer of settlement (especially for overdue debt), where they will accept a lump sum that is less than the total amount you would have paid if you paid in installments.
- Savings – make sure you have enough on hand for unexpected emergencies that might occur. This might be your fridge breaking, your car radiator dying or having to travel to see a sick family member. A good minimum is three months of living expenses, but if you have unstable work or inconsistent income, saving six months of living expenses can be very helpful.
- Essential purchases – such as school uniforms or new tyres – consider any urgent purchases. This might be a great opportunity to replace an old appliance with one that is more energy efficient.
- Mortgage – are your payments up to date? Can you make any extra repayments on your mortgage? Some banks don’t allow this, or allow them only to a capped amount, so check with your bank.
- Superannuation – You may contribute large sums of money to your super. Use MoneySmart’s Superannuation Calculator to see if you’re on track to have enough super for your retirement. Be mindful that choosing to put lump sums into your superannuation means you can’t usually access it until retirement age.
- Treat yourself – If any money remains after these essentials have been dealt with, use some to treat yourself. A holiday or a nice dinner – but be aware that adding these as regular activities may soon drain your savings.
What is most important to you might be in a different order to this list, and that’s okay. The main thing is that you make a plan for the money, so it doesn’t just disappear over time.
If you are receiving any payments from Centrelink or have declared bankruptcy in the last 3 years, you must let Centrelink know you have received a sum of money. Failure to do so could result in a Centrelink debt or a penalty. The Centrelink Financial Information Service Officer may be helpful here. Find out more at Financial Information Service Officers.
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