Tips to use a lump sum to improve your cash flow and boost your wealth
You’ve just been paid your bonus from work. It’s a tidy sum, and much deserved. Now it’s finally in your bank account, you’ve got to figure out what to do with it.
You’ve always fancied upgrading your TV to an all-singing, all-dancing surround sound cinema system. Maybe a few couple of weeks in Seychelles would provide some much-needed rest and relaxation. But will a state-of-the-art entertainment system improve the dross on television? And how long will the memory of your holiday last after you’ve landed back on home soil?
In this article, you’ll learn what you should be doing with that bonus, and how you could use it as a foundation to build the funds for a luxury holiday every year.
Increase your personal cash flow
What could you do with a couple of hundred pounds or more every month? Especially if you didn’t have to work any harder to get it?
The first thing you should tackle is your personal cash flow. Pay down your debts:
- Credit card balances, on which you probably pay an interest rate of 25% or more.
- Store cards, which charge even higher than credit cards.
- The car loan, which is sapping your funds every month.
- Personal loans, if you have them. You are probably paying 8% and more for these.
Pay off your overdraft, too.
A couple of years ago, a friend of mine, Dave (yes, I know, everyone knows a Dave!), received a sizeable bonus from work. He used some of it to eliminate his debt. He paid off his credit card balance, car loan and overdraft. Overnight, he found that he was almost £500 better off each month.
Now his problem was what to do with his extra cash flow, the equivalent to an after-tax pay rise of £6,000 every year. Like working a part-time job for extra money.
Make sure you have an emergency fund
When you have an emergency fund, those financial upheavals you used to have every few weeks seem to disappear. They don’t really, it’s just that you’re better prepared. The cash is there, and so they cease to be emergencies.
But an emergency fund does more than simply prepare you for the worst financially. It lets you sleep better. And when you sleep better, you’ll find that your personal and professional life improves. You’ll be less stressed and more relaxed. You’ll make better decisions, and your performance at work will probably improve. Maybe an even bigger bonus next year?
Dave left £5,000 in his emergency fund, saving it in a tax-efficient cash ISA. He decided to deposit an extra £100 per month in this cash ISA from his extra £500-per-month cash flow.
OK, now that you’ve sorted your day-to-day finances, you might decide to treat yourself. But be warned, a big spend now could leave you hitting that credit card again very soon, and with nothing to show for it.
Remember that a bonus is exactly what – you mustn’t rely on a bonus being paid next year. You may still have the cash to splash, but make sure you don’t drown in renewed debt.
Dave thought long and hard about how to treat himself and his wife. He asked her what she thought they should do, and she insisted they should do something they would appreciate for a long time. Seychelles wasn’t what she had in mind, though travel was. They went to France, to visit her grandfather’s grave. He was killed in the war, and it had always been her desire to go and pay her respects. And they spent a romantic weekend in Paris after.
Build for the future
Now, it’s time to consider your future. Should you pay off some of your mortgages, or should you invest as you aim to achieve your life goals sooner?
Here’s where things get a little more complex:
- By paying a lump sum off your mortgage, you could reduce your outgoings even further.
- Or you could continue to pay the same amount on your mortgage payments and become mortgage free sooner.
- However, you may incur an expensive early repayment charge, even for a part-payment in a lump sum.
These aren’t the only considerations you need to make. You should also consider how much your money could make you or save you. For example, let’s say your mortgage interest rate is 3.6% and you have £50,000 bonus remaining. If you repay this off your mortgage, you should reduce your mortgage interest payments by around £1,800 per year (£150 per month).
This is exactly the kind of position that my mate found himself in. His cash flow was so improved, that he didn’t need to reduce his outgoings further. Instead, he wanted to invest the money. If he could make more than 3.6% per year, then it would be a better deal than repaying part of his mortgage.
Property investment – a better home for your bonus?
Dave’s balance from his bonus was £25,000. And he had £400 more cash flow per month and was saving £100 per month. But he agreed with his wife – they should do something with the cash that they would appreciate for a long time.
Instead of paying a lump sum off the mortgage, they borrowed another £25,000 from the equity they had in their home – equity release is a proven and effective property investment strategy. It was easily affordable from the extra cash flow he had created by sensible use of his bonus. Now Dave and his wife had a total of £50,000 in cash.
They used this as a deposit on an off-plan property investment. The price they agreed to pay was £175,000, including the discount negotiated. They have recently completed on this property. It is no longer worth £175,000. Its current market value is £205,000.
£30,000 profit in two years. Now that, I think, was a great use of Dave’s bonus –and certainly something they are going to appreciate for a long time. Especially as they have just let to their first tenant, and the rent is more than covering the mortgage interest and investment property management costs.
Will you be savvy with your cash?
If you’ve recently received a bonus, inheritance, or have cash in the bank wasting away, be like Dave. He weighed up his options, considered all possibilities, and made the choice to invest the cash in his future.
We’re here to help you. To book a property investment strategy consultation, contact Gladfish today on +44 207 923 6100. We'll discuss your goals, your financial position, and how property can help you reach your desired lifestyle faster.