Planning & Budgeting

How to invest a windfall

Annual bonuses, gifts, and receiving an inheritance are all examples of a windfall we might receive. But, as tempting as it may be, it makes little sense to spend it immediately. Instead, it is much better to invest the cash towards your future.

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How to invest a windfall
  • If you receive a windfall, you might be tempted to splurge the cash immediately
  • Depending on your financial situation, you may be better off investing the cash
  • How you invest will depend on your investment goals and when you want to “cash out” from the investment
  • Speaking to a financial adviser can help you make smart decisions to safeguard your financial future

Investing a windfall: FAQs

  • How much money is considered a windfall?

    A windfall is any amount of money that you did not expect and that exceeds your regular income. Most would consider any amount over £1,000 a windfall - and often, the amount of money is much higher than that.

  • What should you do with an unexpected windfall?

    The best thing you can do with an unexpected windfall is to pay off debt, top up your emergency fund, fund your retirement and start investing. Resist the urge to splurge!

  • Should I use a windfall to pay off debt?

    Some debts are better than others, but if you're stuck with credit card bills, it may be best to use the windfall to pay them off. If you pay a lot of interest to the credit card company every month, this can easily outweigh the return you would get if you put all the new money into a normal savings account.

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It can be difficult to get started with investing.

Many of us don't like to think about the future or feel like we don't know enough about investments and finances. But with a few simple steps, you can put yourself on a firmer financial footing for the future.

If you feel unsure about what to do about a financial advisor can give financial windfall advice specific to your circumstances and investment goals. While the cost of seeking financial advice can sometimes appear prohibitive, in many cases it’ll pay for itself.

Why is it important to invest your money properly?

What might have worked many years ago doesn’t anymore, if it ever really did.

Keeping cash under the mattress or in a current account or savings account will quickly see it lose value in the face of inflation. That’s the last thing you want to happen with your windfall! Some banks even charge you a monthly account fee while simultaneously “rewarding” you with an interest rate way lower than inflation. But they’re quick enough to hike your mortgage payment when rates rise!

But not saving at all and spending everything immediately does not make sense either. Most of us already own far too many things anyway. Falling foul of mindless consumption won’t do any favours for your future.

Whether you’re aiming to invest and save towards a specific goal or just want to make your money work as hard as possible now so it’s there when you need it, there are several investment options that will help you.

Getting comfortable with the idea of investing

The biggest barrier to investing is often ourselves, especially if we’ve never given much attention to our pensions or feel like we’ve never had much money. But, at the same time, we’re surrounded by regular stories about pension gaps and older people facing poverty.

Thankfully, it’s straightforward to learn what you need to do, and it’s never too late to invest in stocks, open a new pension, or start saving for a rainy day.

Consider your savings and investment goals. And think about how you would feel and what it would mean if one day you got to take that dream holiday or could tell people you were mortgage-free. With these visions in mind, it becomes much easier to motivate yourself to consider investing and explore your options.

How to start investing

First, consider that goal.

  • Are you saving for a specific goal or purchase? 
  • Do you want to boost your retirement savings? 
  • Or do you simply want to build up assets?

Alongside your goal, you should also consider your investment timeline – i.e., at what point do you want to “cash out” your investment. Knowing this is vital because if you’re saving for a point 20 – 30 years in the future, your attitude to risk and how you approach your investing will be way different to if you only want to invest for a decade.

On top of this, consider what type of investor you are. For example, do you place more emphasis on security, or do you want to earn as much return as possible? When you research your investment options or speak to a financial adviser, it may quickly become clear that your objectives mean you need to take a specific approach.

Emma Robertson from Share Action told Pension Times it was also vital to focus on specific investments, saying: "No matter how great the short-term return of your investment, in a world made dysfunctional by the climate crisis, we all lose out. Pension savers have the power to help shape our future by choosing to invest their money in pension funds that protect people and the planet."

High risk, high return

Investments that offer the potential for high returns are typically higher risk and more prone to fluctuations. Likewise, investments that offer lower returns tend to be steadier and offer way less risk.

Whether you’re investing a significant sum of money or a relatively small amount, it makes sense to diversify your investments so you spread risk across your portfolio.

The right mix makes a difference

Generally, the broader the spread of your investments, the better. A financial adviser will be able to help you with diversifying your investments to ensure you carefully balance risk with the potential rewards.

If you have decided to invest your money, you are already on the right track. 

The right investment for you will depend on your objectives, retirement timeline, risk appetite, and much more.

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