Forty-two percent of South African consumers say they, or someone they know, has lost the wealth they inherited*, with nearly half saying the money was spent on things that didn’t matter or create wealth!
It’s great to be able to spend a windfall, but it’s even better if you spend it well on your and your family’s future.
So, imagine you inherit R1 million. What could you do with it to secure your financial future? We looked at ways to spend an inheritance well so that it lasts for many generations.
What could you do with R1 million?
|You can…||In 10 years you will have…|
|Buy a BMW 4 Series Convertible (just)||An old car with outdated tech|
|Rent a luxury yacht in the Mediterranean for a week||Photos?|
|You can…||In 10 years you will have…|
|Buy a townhouse in Midrand, Gauteng||A home for you and your family, paid off, or a second property to rent out and earn an income|
|Invest in a range of unit trust funds, diversifying your portfolio into a mix of asset classes, earning an 8% return each year||R2 158 925|
The car is nice, you’ll turn a few heads, and the holiday is great – you’ll certainly make lots of lovely memories. But what then? And what about the last option, where you invest your money and get an additional R1 million-plus? Yes please!
For most of us, R1 million is a lot of money – money that we can really use to secure our financial independence and help future generations in our family. You can, of course, do a mix of things with your R1 million – perhaps invest 80% of the funds and use R200 000 for a new car, if you really need one. But spend your R1 million well, and you and your family can enjoy a much more secure financial future and leave your children and theirs a generational wealth inheritance.
How to spend R1 million well
We chatted to Russell Ho, certified financial planner, to find out how you can go about spending your R1 million wisely and include some do’s and don’ts in our guide below.
1. Financial education is a must
Many an inheritance is lost through a bad investment, bad advice, and sometimes just uncontrolled spending on consumer goods such as the latest and greatest luxury car. And often this is just because people don’t know enough about how to manage money. If you improve your financial education, and teach your children good money values, both you and they will be better equipped to make sound financial decisions.
We’ve said it before, but it’s worth saying again: You are not born with money management skills. No one is! You have to learn them. The best time to start learning money management skills is now, with Truth About Money’s online financial education course.
Do: Learn about money and finances together as a family and teach your children good money values such as saving before spending, not getting into too much debt, as well as the importance of saving for emergencies and financial goals such as a new home.
Don’t: Assume you know how to manage money! Take some time to learn good money management skills and good money habits.
2. Have a purpose
If you don’t know what you want to do with your inheritance that’s okay. But avoid spending before you know exactly what you want.
Do: Spend some time thinking about what you want in life – for you and your family. Write down a few goals and use your inheritance to achieve those goals. Remember you don’t have to spend the inheritance all at once, or on one goal. Russell says it’s okay to split it up and use it for different goals, such as investing some for your retirement, buying a business and investing for your children’s education.
Don’t: Spend your inheritance without a clearly defined plan.
3. Seek advice from an expert
This is probably our top tip! It’s usually not a good idea to broadcast your good fortune on social media but friends and family will get to know about your inheritance and offer their advice or ask for some money for their goals! Well intentioned as most of these are, unless they are experts, following their advice can be risky business!
Certified financial planners are experts, and they can help you spend, save and invest your R1 million wisely! You can find a financial planner and check their qualifications on the Financial Planning Institute of Southern Africa’s website.
Financial planners can:
- Help you with the admin, such as which bank account to use, how to keep the money secure and any FICA requirements.
- Negotiate and advise on any tax implications. A straightforward inheritance or payout from an insurance policy should not be taxable, but there are many different tax regulations and tax requirements, and you will need to declare your inheritance on your tax return.
- Help you set some financial goals and show you how to achieve them – and offer some coaching. Advisers can also help you deal with the peer pressure, so you don’t spend it all on looking good, which Russell says is very common, especially for young beneficiaries of a windfall.
- Give you objective and independent advice, including where to invest and how to set up your own business.
Do: Ask your financial planner for advice and work with them over the years to grow your inheritance.
Don’t: Follow the advice from a non-professional, family or friends without consulting your financial planner.
4. Pay off debt
When you pay off debt you free up your cash flow, which gives you more money to invest and put towards your goals, Russell says.
Do: Identify any debts you have, and pay them off, according to a plan you and your adviser have drafted and agreed on.
Don’t: Take on more unnecessary debt. And say no to offers of increased credit limits and loans that come your way when your bank balance increases.
Take a deep breath
Like most of us, you will have fantasised and spent your R1 million in your head, many times! But when it comes, you will need to take a deep breath, put on your adult thinking cap, and find ways to use the money so that your and your family’s futures are secure. Follow our four tips and you can!
*1LIfe Generational Wealth Survey