What should I do with a lump sum: Save, super or invest?

Get Started Investing

Host Jess sits down with financial adviser Tom Hayes from Shadforth to break down the best uses for a $20,000 lump sum of money. They system

Key takeaways

Tom Hayes stresses that an emergency fund covering three to six months of living expenses must be established before deploying a lump sum into investments or debt repayment.
Keeping $20,000 in a standard transaction account erodes purchasing power by approximately $780 annually due to 3.8% inflation, making high-interest savings or offset accounts far superior for short-term parking.

Main topics

Emergency fund requirements & cash management
Transaction accounts vs high-interest savings vs offset accounts

Notable quotes

Superannuation remains the most tax-effective wealth creation vehicle in the country.

Conclusion

Listeners receive a structured decision-making framework to evaluate lump sums by

Transcript preview

Speaker 3 (0:00) Most of these pay 0 % interest. So if you've got your $20,000 in there, it's earning you nothing, precisely. It's one of those things, you don't need it till you need it. And when you do, it's very important. Credit card loan, personal loans, car loans, these are all sort of wealth creation killers, as we say. Oh, everything was going down, so I sold everything to be safe. And you're like, Speaker 2 (0:18) oh no, that's the Speaker 3 (0:20) worst thing we can do. Superannuation remains the most tax-effective wealth creation vehicle in the country. Four out of every five calendar years, markets go up. they end higher than they started. Speaker 1 (0:34) Welcome back to Get Started Investing, a show that helps you make the most of your money. I'm Jess, and this year I finally started investing after spending years completely avoiding thinking about money. Naturally, as a beginner investor, I have plenty of questions about investing. As it turns out, so do you guys. So each week I get to sit down with an expert to answer them. Today we're tackling how to make the most of a lump sum. Imagine you have received an unexpected chunk of money. Maybe you don't have to imagine. Well, lucky you. It could be a bonus, an inheritance, a gift from family. Maybe it's the profit from selling an asset or starting a side hustle. It's exciting, but it can also raise some really big questions of what to actually do with it. So in this episode, I walk through the different options with the financial advisor, Tom Hayes from Shadforth. We use real numbers to walk through like the pros and cons of each option, and then hopefully you can make a decision that fits in with your goals in your life. Alrighty, let's get into it. Thanks Speaker 3 (1:24) so Speaker 1 (1:24) much to MLC for sponsoring this episode and helping us keep all of our content free. Tom, welcome to Get Started Investing. Thank Speaker 3 (1:30) you for having me. Speaker 1 (1:31) Good to have you here. So a bit of context for this chat. We at Equitymates are currently going through our review process, as I'm sure a lot of other people are. Speaker 3 (1:40) I Speaker 1 (1:40) know we've been following my journey. I don't know what that's going to look like. If I'm getting... A bonus. Hope so. And then on top of that, we've been getting a lot Speaker 2 (1:50) of Speaker 1 (1:50) questions in from the community as always. Obviously all different circumstances, but the overall theme being like what to do with a lump sum of money. We talk a lot on the show about like dollar cost averaging and what to do with your paycheck and how to manage that in like a spending plan. But it's this lump sum piece that. I would like to focus on today, if that's okay. Speaker 3 (2:10) Yeah, great. Sounds good. Speaker 1 (2:11) I want to kind of talk through it in a case study. Speaker 3 (2:13) I Speaker 1 (2:13) want to look at it as if I'm coming into your office. I'm on, let's say, $110,000 as a salary to make the numbers as easy as possible. Yeah, thank Speaker 3 (2:24) you. Speaker 1 (2:24) However easy that is, yeah. And let's just say I've got like a $20,000 lump sum. I think the first thing to touch on, Tom, would be like trying to figure out why this is such a common question. Like there's so many people that... write into us about a lump sum, whatever that may be, or for whatever reason, but there seems to be the sense of almost anxiety around it. Like, do you see that with your clients? Speaker 3 (2:45) Yeah, we certainly, we certainly do. And I think a lot of it stems from a feeling of responsibility to make sure they do the right thing and, you know, not put it to waste. You know, unfortunately, if you're tuning in today to find out what the right answer is, you're not going to get it. Okay. Because it depends, you know, to be blunt, it's going to depend on your personal situation. It's going to depend on your lifestyle and your needs and your objectives. It's not going to be the same for every person. There's going to be the best financial outcome, but you need to find a balance between that and what works for you as an individual. I Speaker 1 (3:17) guess you said they're not going to find like the right answer, but I think what we can do is I hope I can like ask you the right question so that. They can see the maths behind the numbers and I guess work out what works best for them, would you say? Is that what you do with clients? Speaker 3 (3:33) Yeah, definitely. So our job is to work through all the different scenarios, okay? Have a look at the different outcomes from doing this or from doing that and walk through all the different scenarios so that they understand the impact of the decision that they're making. Speaker 1 (3:46) Yeah. Having worked out your goals and what you're working towards, work out which one works best for you. Speaker 3 (3:50) Exactly. And it might be a little from column A and a little from column B. Yeah. Okay, it might be a mix of a couple of things that works best for you. Maybe it's putting some money in the offset, but also contributing some to super or investing it. It doesn't have to be a straight line and a simple solution. Okay, it might be a little bit of a couple of things. Speaker 1 (4:09) Right, well, it's probably good to get right into it then. What's one of the first things you would ask someone if they came to you and said, hey, I have $20,000? The Speaker 3 (4:16) first thing I'd like to know is where did it come from? Okay, that's going to give us a sense of are you going to be able to use all the money? Do you need a provision for tax? What is actually available for you to use, invest, save? Speaker 1 (4:26) So I guess thinking about that, the different options I could tell you are things like a gift. Speaker 3 (4:33) Yeah, a gift, an inheritance. You could get a bonus from work, as you said. Maybe it's Speaker 1 (4:39) a Speaker 3 (4:39) redundancy payout or something along those lines. So there's a few different options. Speaker 1 (4:44) So talk me through those different options and what it would look like tax wise. That would be helpful. So Speaker 3 (4:48) let's start with the easy ones. So inheritance, for example. So if it's received as cash, generally tax free. Okay. So if you inherited a parcel of shares, for example, and then you sold those, there may be tax implications, but assuming cash, Speaker 1 (5:03) no Speaker 3 (5:03) dramas. No tax. No tax. And that's going to be the same as a gift from family. You know, we're very familiar with the bank of mum and dad, you know, helping people get deposits for homes, et cetera. But there's going to be no tax associated with that, assuming it's cash as well. Speaker 1 (5:18) Okay. Okay. So that would be the best one if Speaker 3 (5:20) I could choose. Nice and simple. Yeah. Moving into the sort of the payments from your employers. So a bonus. Okay. So if it's paid in cash, it is a taxable payment, obviously, like your normal week to week salary. But your employer will withhold the PAYG tax. So the amount that you receive is the amount that you keep. Speaker 1 (5:38) Okay. So that 20 grand, it would have already been taxed. So I'll get however much in my bank account. Speaker 3 (5:43) Yeah, correct. So the 20 grand would be net of what tax has already been taken out. Okay. So that's the amount you get to play with. Speaker 1 (5:50) Thinking about it, because I was thinking, would I have to worry about putting money aside to then pay my tax at the end of the year? But that's all... pretty much done for you. So what lands in your account should be yours. Speaker 3 (6:00) Yeah. There is a couple of scenarios where you would be responsible for provisioning for the tax. So maybe if the windfall of cash was from selling an asset, right? So shares, property, assuming you make a taxable gain, there's going to be tax payable on that. It'll be added to your taxable income for the year. You'll do your tax return and you'll have to fork up the payment. Okay. Okay. So that's on you. And then the other option, Or other scenario would be if you are in an employee share scheme and you receive shares in the company that vest during the year, it's treated as taxable income for that year. But because you've received them in shares, there's no tax taken out and you would need to come cover that yourself either by maybe selling some shares or using existing cash that you have on hand. Speaker 1 (6:47) All right, really helpful. So let's assume it was a bonus for now. What would be the first thing you... want to go through with me? Speaker 3 (6:56)