A Windfall: What to do with a surprise sum when it’s not enough for a house?
I had a client come to me last week who had come into some money from a relative who had passed away. It was a significant sum of money. So what do you do with it? Spend it on a new Euro car! YES….well maybe not so fast…what about a house?
New Zealand has seen a declining housing market in the past 18 months. However, the 10 year price rise preceding this slight decline has made homeownership an elusive dream for many. According to REINZ, as of 2021, the median house price in New Zealand was a whopping $810,000. So, what if you find yourself with a surprise sum, say from an inheritance, but it’s not enough for that dream house?
1. Clear Outstanding Debts:
Your first consideration should be to tackle any high-interest debt, such as credit card debt. New Zealanders owed over $6.5 billion in consumer debt in 2021. Paying off these debts not only reduces financial stress but also positions you better for any future investments.
2. Emergency Funds:
If you don’t already have one, consider establishing an emergency fund. Financial advisors often recommend keeping three to six months’ worth of living expenses for those unforeseen circumstances. With the uncertainty of global events like the COVID-19 pandemic, having a cushion has never been more crucial.
3. KiwiSaver Top-Up:
KiwiSaver is New Zealand’s voluntary savings initiative, helping residents save for retirement or a first home. If you’re under 65, contributing a lump sum to your KiwiSaver can be an excellent way to boost your retirement savings. With annual returns varying but often around 5% to 7% for balanced funds, it can be a relatively safe and lucrative option.
4. Diversify with Investments:
Stock market investments can be a good option. The NZX 50, which comprises the country’s 50 largest listed companies, has returned over 20% annually in some recent years. Platforms like Sharesies or Hatch offer easy access for beginners. However, always remember the stock market can be volatile, so it’s wise to diversify investments and consult a financial advisor.
5. Consider Alternative Real Estate Options:
While a house might be out of reach, other real estate investments can be more accessible. Look into Real Estate Investment Trusts (REITs) or fractional property investment platforms like PropertyShares. These allow multiple investors to pool funds and invest in properties, earning returns proportional to their contribution.
6. Delve into the Bond Market:
NZ government bonds or corporate bonds can be a stable investment option. They may not offer as high a return as stocks but are generally considered safer, providing regular interest payments.
7. Explore Peer-to-Peer Lending:
Platforms like Harmoney and LendingCrowd connect borrowers with individual lenders, bypassing traditional financial institutions. As a lender, you can earn interest on the money you lend, often higher than standard bank savings rates. However, there’s also a risk that borrowers might default, so diversification across many loans is recommended.
8. Education and Skill Development:
Consider using a portion of the funds for further education or skill development. Whether it’s a professional course, workshop, or even a degree, upskilling can increase your earning potential in the long run.
9. Support Local Start-ups:
Angel investment in local start-ups can be a way of potentially earning returns while supporting the NZ economy. Organizations like the New Zealand Angel Association can help connect potential investors with budding entrepreneurs.
10. Treat Yourself – Responsibly!
While it’s crucial to think about savings and investments, it’s also essential to enjoy a portion of your windfall. Whether it’s a holiday (domestic travel can support local businesses), a special purchase, or an experience, allocate a responsible percentage for personal enjoyment.
Inheriting or receiving a surprise sum can be both a blessing and a daunting responsibility. While the temptation might be there to make quick decisions, it’s essential to approach the situation methodically. Consult with financial advisors, weigh the options based on risk tolerance, and align your choices with long-term goals. New Zealand’s economic landscape offers myriad opportunities to grow your windfall, even if it’s not immediately turning it into a home.