The wonders of a windfall

It’s hard to believe that the end of another year is already upon us. Under “normal” circumstances, December would be a time when many of us would be looking forward to receiving an annual bonus. However, the reality is that some companies have struggled over the past 12 months and may not be in a position to pay their staff something extra at the end of the year.

But that shouldn’t stop you from having a financial plan in place for receiving additional income. At M&G Investments, we believe in being prepared for the possibility of future events. Whether you receive a financial windfall in the form of a bonus, tax refund, or any extra money for work you’ve done outside of your normal job, it’s important to think about how to use your cash injection wisely.

It can be very tempting to spend a windfall on a large-ticket item or something you hadn’t intended to buy because it feels like "free" money, especially when it’s a surprise. But squandering this boost to your financial wellbeing can be wasteful, especially when there are many investment opportunities that can yield so much more value than simply splurging could.

The enjoyment of spending money is often short-lived; but investing your money can be very rewarding, particularly over the longer term. Here are some suggestions on how to use your windfall wisely: 

1. Boost your retirement savings. There’s been a number of studies published that suggest South Africans may be in a retirement crisis, with very few having sufficient funds to retain their standard of living once they enter retirement. Ad-hoc lump sums are a wonderful way to boost your capital. If you are behind in your retirement savings, a windfall can help you to catch up. You can try our Retirement Calculator to assess your progress so far.

2. Increase your discretionary savings. You could add a lump sum into your discretionary unit trust account or tax-free investment (for the latter, make sure not to exceed your annual limit). Ultimately, your future self will find this far more satisfying than spending everything right away, in one go, with nothing really to show for it. You can also use your unit trust account to save for something that you really want in a year or two. Point being, you will have more options and a greater sum available if you invest a windfall and wait a while for it to grow. For example, if you had invested R50,000 in the M&G Balanced Fund 12 months ago (near year-end 2020) it would have been worth R65,600 as at the end of October, earning you an extra R15,600 on your initial investment. Try our Past Fund Performance tool for more illustrative figures based on our historical fund performance.

3. Settle your debt. If you do have some debt to pay down -- particularly short-term, expensive debt such as a maxed-out credit card -- paying it off is another great step to take to improve your financial wellbeing. While it’s mentally difficult to use "current" money to pay back the past, it’s important to get out of debt. The less you owe, the less interest you will pay. It’s worth discussing with a financial adviser how best to use your windfall. You may even be able to eliminate a sizeable chunk from your debt burden and increase your savings. Try our Goal Calculator to see how much you should put away now for that future “something special”, and if you’re not sure which fund to invest in, our Fund Selector tool is a great place to guide you on your way.

4. Consider an alternative. It’s definitely a good idea to diversify your investments, and you could even consider greater offshore exposure in your unit trusts. You might have some preconceptions about offshore investing, so this article on the debunking of three common myths could be useful. Chatting to a financial adviser is best to assess what sort of exposure you could consider.

Create your own windfall  

Keep in mind that by making additional contributions to an approved retirement fund could mean that a tax refund is due to you, creating a windfall that can be reinvested. You could also decide to put aside R500 a month from December this year to November next year. This way you guarantee you’ll have a bonus in December 2022, no matter what. You might consider doing this through the M&G Money Market Fund to allow for stable growth that aims to beat the return that you would have earned if you left your money in the bank.  There are a number of other lower-risk options available for short-term investments, such as the M&G Income Fund, which aims to maximise investment income over the short to medium term.

Whichever option you choose, having a financial plan in place will help reduce the chances of spending your cash injection wastefully, and increase the probability of getting the most out of it.

For more information on investing with M&G Investments, please contact our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.