Immediate steps to take after receiving a large cash windfall

Written and accurate as at: 11 April 2024

Receiving a large sum of money — whether it’s through inheritance, divorce settlement, or workers compensation — can seem like a blessing at first. But the novelty and excitement can quickly give way to stress and decision paralysis. Below are a few things to consider if you find yourself in this position.

Don’t let it go to your head

The rush of having a large sum of money fall into your lap can put some pretty outrageous ideas in your head.

Before you go spending your newfound wealth on something lavish, take a few days to process the news and think seriously about what you intend to do with it.

While you mull things over, it might be a good idea to stash the money in a high-interest savings account. Just keep in mind that deposits are generally only insured up to $250,000 per authorised deposit-taking institution (ADI), so you might have to spread out larger sums over a number of different ADIs for that extra peace of mind.

Seek financial advice

Even if you consider yourself particularly financially savvy, there are bound to be gaps in your knowledge. It might be tempting to turn to friends, family or even the internet for advice, but at the end of the day there’s no substitute for a qualified financial adviser. 

A good financial adviser will work with you to uncover your goals and draw up a blueprint to achieve them with help from your newfound wealth. And having an ongoing relationship with them can also come in handy if you have any questions or concerns about how to manage your finances down the track.

Consider paying down your debt

Conventional wisdom might tell us it’s more sensible to focus on your long-term objectives than short-term ones, but the opposite is arguably true when debt is involved. With help from your financial adviser, try to identify which sources of debt, if any, it would be in your best interests to pay down. 

For some people, credit cards will be a priority, since the interest rates are typically high and there’s potential for the debt to snowball. But others might prefer to chip away at their mortgage with the intention of lowering the amount of interest paid over time. 

Boost your super

Many people struggle to get excited about super, but the fact is it’s one of the most tax-effective savings vehicles available to Australians. If you can contribute some of the windfall towards your super it can go a long way towards helping you secure the retirement you want.

Of course, the benefits here can be greater if you’re still several decades away from retiring. That’s because compound interest (which is the interest earned not just on the money you’ve invested but the interest that money has already accrued) favours those with a longer investment horizon.

Keep in mind that your superannuation won’t be accessible until you have met a condition of release (usually retirement or age 65), and there are limits to how much super you can contribute each year before extra tax is applied. 

Under current rules, you can make before-tax contributions of up to $27,500 per year (including your employer contributions). That said, you might be able to add more by carrying forward unused concessional contribution limits from previous years, provided your total super balance was below $500,000 on the previous 30 June.

After-tax contributions are also allowed up to $110,000 per year (and you may be able to bring forward the next two years of caps), but unlike before-tax contributions — which are usually taxed at 15% instead of your marginal tax rate — you won’t get a tax deduction on these. 

Think about other ways it can be invested

Depending on how much you’ve received (and how much is left over once you’ve topped up your super and covered any high priority debts or expenses), you might be in a position to put the money to work in other ways so that you and your family are provided for in the years to come. 

What that looks like will depend on your financial situation and how much investment risk you’re willing to take on. Someone younger might be more comfortable having a portfolio stacked with riskier investments given they’ll have more time to ride out any volatility in the market, whereas someone older might be more conservative in their approach.

In the end, there’s no right or wrong way to handle a large windfall, but some choices are bound to pay off more in the long run than others. Try to avoid an ‘easy come, easy go’ mindset — that is, treat the money as you would anything else you’ve earned. And do your best to postpone any discretionary spending until you’ve drawn up a plan to make the money last.