This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Receiving a large sum of cash can be exhilarating and overwhelming. So many possibilities for what to do with it. Yet, what if you waste that money on the “wrong thing?”
Whether you receive a bonus, an inheritance, a redundancy payment or some other source of lump sum, it pays to have a plan. That way, you are guided by principles and goals, rather than pulled by impulses.
Below, our Teesside financial planners answer the question: “What should I do with a lump sum?” We discuss the pros and cons of investing, saving, paying off debt or just enjoying the money. If you’d like to discuss your own financial strategy with us, please get in touch.
Clarify your financial picture
It is essential to begin with your current financial situation. Here you are asking yourself: ”Am I in a stable enough place to make this money work for me in the best way possible?”
Think of it like setting out on a long journey: if you’re standing in a leaky boat, patching up the holes is far more important than charting a new course. So, take stock and consider:
- Do I have a strong emergency fund ready? A good rule of thumb is 3-6 months’ worth of living costs in easy-access savings.
- Are any large bills coming up that I need to set aside for – e.g. a home repair?
- Do you own anything that has become a financial and emotional drain, but you haven’t been able to get rid of it due to the cost of essential repairs, legal fees or the tax?
A lump sum could be the perfect opportunity to set your house in order. To bring this all together, do a quick personal audit:
- What’s your net worth (assets minus liabilities)?
- Where is your income coming from, and how stable is it?
- What are your fixed monthly obligations, and how easily can you meet them?
- Are there areas where you feel financially “stuck” or uneasy?
The Case for Paying Off Debt
If you are facing large and expensive debts (e.g. unpaid credit cards), it often makes little sense to invest all of your lump sum.
Bear in mind that the potential returns will almost certainly be eclipsed by debt interest, which is often in excess of 20% APR.
Investing can be attractive due to the potential returns on offer. However, remember that paying off debt can offer a “guaranteed return” by reducing your interest burden and improving your financial flexibility.
It’s worth noting that not all forms of debt are made equal:
- High-interest consumer debt – e.g. credit cards, payday loans and store cards. These are among the most urgent to clear, as the interest charges compound quickly.
- Unsecured personal loans. These may carry lower interest rates than credit cards, but still drag on your monthly cash flow.
- Secured loans and mortgages (“good debt”). Whether to pay these off depends on your rate, loan term and alternative opportunities for the lump sum.
- Student loans or government-backed lending. Paying them off early may not be worth it, depending on the terms and your projected income.
Paying off debt is usually wise. However, it may not make sense if your debits are low-interest and long-term (e.g. a mortage under 3%). Here, investing the lump sum might be wiser.
It’s also worth considering whether paying off debt would drain your emergency fund or leave you financially vulnerable. In which case, it’s safer to keep some cash liquid.
Why (and When) to Invest a Lump Sum
If you’ve addressed your high-priority financial gaps (e.g. debt, savings or pressing liabilities), you may find yourself in a stronger position to invest some, or all, of your lump sum.
Before putting your money to work, consider the “why” and “when” behind this decision. What are your goals, time horizon and tolerance for risk?
Investing can yield higher returns than saving or repaying debt, particularly over the long term. Stock market investments like the S&P 500, for instance, have produced average returns of 7-10% per year over decades, especially when diversified across global markets.
If your goals are further ahead – e.g. retirement, children’s education or future financial independence – then investing a lump sum can be a smart move. If you need the money within 3-5 years (e.g. for a home purchase), then consider cash or “safer” assets in case of a crash.
If you’re hesitant to put a large amount into the market all at once, you’re not alone. Many people fear investing a lump sum at the “wrong time” – right before a market downturn.
This is where pound cost averaging (PCA) can be beneficial. Here, you “spread out” your investment over a series of months to reduce the risk of investing at a peak. This can ease emotional anxiety and smooth out the volatility.
Invitation
Of course, there is also the option to enjoy the money you’ve received. Maybe it’s time for a long overdue family holiday, or a property extension. The key principle is to align your lump sum with your goals and emotional discipline.
We hope this content gave you more clarity. To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Teesside or Cumbria.
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. Content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.