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In part two of our savings month series, previously, we dug deeper to find out common excuses that we often have when the savings topic comes up. Through the advice of financial advisers we are now knowledgeable about how to overcome those excuses. 

In part three of our series, unpack lump sums. What do you do when you receive them, especially when it is not expected? Palesa Dube, Wealth Manager at Wealth Creed helps us manoeuvre lump sums and what to do with them. 

Dube explains that a lump sum could be any substantial amount of money an individual receives unexpectedly or out of the normal course of where they usually earn money from. People receive lump sums in different ways such as salary bonus, winning the lottery, proceeds from a lawsuit settlement (i.e. RAF), insurance pay-outs, an inheritance, profits from selling a property or unfortunately in the current economic climate, a severance payment when one is retrenched from their employment.

Receiving a lump sum during a pandemic with many job losses and salary cuts may seem like a blessing, however Dube stresses that, ‘’it is always a good idea to invest your money. Remember that a pandemic is stressful to endure, however there are always opportunities. Take advantage of those. Consult with a professional to help you navigate the various investment alternatives, taking your specific needs into consideration.’’

We have watched some popular shows where people were sharing their experiences about how they squandered their lump sums. This happened because of poor planning and not consulting the right people. Dube suggested these five steps to take when you receive a lump sum:

Five Steps To Take After Receiving A Lump Sum
  1. Plan

Don’t spend the money immediately. A consideration could be putting the funds into a call/money market account with your bank while you plan precisely what you’ll do with it. Seek the help of a Certified Financial Planner. 

2. Have A Strategy For The Future

These could include providing your children with the best education you can. Perhaps you are passionate about helping youth from your neighbourhood advance their tech/science skills. Jot these ideas down and have them ready for when you consult with a Financial Planner. A good financial plan is one that lets you achieve your highest life goals and aspirations. 

3. Eliminate Undesirable Debt

These include personal loans, clothing account debt, credit card debt etc. Follow this with ensuring that you then have an emergency fund in place. It is recommended that you have between 6 to 12 months’ worth of funds as an emergency fund. 

4. Consult A Certified Financial Planner For A Wealth Plan

This plan will help you assess the provisions you have in place or gaps that need filled in the event of your untimely passing, if  you become incapacitated or to ensure that you have enough for retirement and sustaining your expenses going forward.

5. After Your Wealth Plan…

It then becomes much easier to know where your money needs to and can go. A Certified Financial Planner can assist in setting up the right structures for your affairs as well as recommending appropriate investment alternatives for you. Once this is in place, you can then go and splurge the excess, knowing that you’ve ticked all the boxes!

Are Lump Sums Taxable? 

Dube shares with us that, ‘’it depends on the nature of the lump sum, but in most instances tax would either be payable by the recipient or at the least, it would have been deducted prior and the net of tax amount then paid to the recipient. As an example lottery winnings are not taxable in South Africa as they are regarded as capital in nature. Furthermore, lottery winnings enjoy a special exemption from Capital Gains Tax as well. However, should the winner start feeling generous and want to share their loot, such donations would give rise to donations tax where more than R 100 000 in a given year is donated.’’ 

Should We Be ‘Saving Money’ Or Should We Be Looking For Ways To Exponentially Grow Our Money?

Dube affirms that there is room and a need for both. ‘’The first step to sound personal financial management is to ensure that you have an emergency fund in place. 6-12months’ worth of expenses. This money needs to be placed in a savings account (e.g. call account, money market account etc)  where the money is easily accessible when needed but can also earns some interest, which a typical cheque account does not offer,’’ adds Dube. 

Dube continued to say that we need to be investing towards our retirement and other life goals we may have. She advised us to always be reminiscent of the following:

  • Keep your expenses low and avoid excessive spending on lifestyle assets that do not work towards growing your wealth in the long run. 
  • Start investing as early as possible. Even if you can only afford to put away R100 per month. Just start! Make sure to maximize your Tax Free Savings allowance first.
  • “If I don’t own it, I don’t buy it,” said an investor recently. Buying shares has become very accessible these days and so has information. Invest time in empowering yourself with knowledge.
  • Approach a Certified Financial Planner to journey with you on your path to wealth creation and financial freedom.
  • Make money discussions less taboo in your family and close circles. Ensure that a trusted family member or friend knows what provisions you have in place.   

What lessons have you learnt so far in our series? We hope you are implementing those lessons and next year or at the end of this year you will be thanking yourself for taking that financial decision towards your financial freedom.