Back on the Front Burner folks – How to Make the Most of Your Lump sum!!! 👍

A Firstline Securities Limited Blog by: Maxine King

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READ ON…

There is an old adage which states that “when one door closes, another opens”, but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us. That is indeed a truism, but we must recognise that we ourselves must open those doors to explore what is possible and available to us.

I will never forget that eventful day on September 8^th, 2006, when BWIA WI Airways Limited announced that it would be shutting down on December 31^stof that same year. In retrospect, it was a traumatic time of self-denial, where I continued with “business as usual” until I was jolted into full reality upon receipt of my “letter”. At that point my state of mental health traversed along the spectrum: from worry to anxiety to anger to depression…and then, to calm as December 31^st approached.  My thoughts were conflicting to say the least.

Should I….

1. Invest some funds and, if so, how much…when and where?
2. Pay off all of my debt (or part) and if so, in what pecking order?
3. Immediately seek alternative employment in the same field, in the same industry or elsewhere?
4. Consider being self-employed and if so in what area of work?
5. Immediately look for avenues of sustainable income such as short-term contracts?
6. Provide for medical and other contingencies?
7. Use some of the funds as a Transition or Emergency Fund should I remain unemployed for some time, and if so, how much?
8. Look forward to receiving a pension lump sum in the future, knowing that the Plan would no longer have contributions to seed its growth and maintain its surplus position?

I had no immediate answers, so I organised a structured approach to dealing with my current and impending financial situation, once I was able to manage my mental well-being.

Step 1: ACCOUNTING FOR TAXES

I researched the Income Tax Act to determine my taxation liability. My investigations revealed that sums above $300k were subject to taxation at that time, so I accounted for that to determine my net proceeds.

Step 2: MY FINANCIAL STATUS

I must admit that I struggled with the idea of what was a priority at that point in my life cycle. I boiled it down to taking a long, hard look at my financial situation, within the context of my age, my family circumstance, and my general life goals. I laid out everything that had financial implications: my property, my savings, my investments, my income streams, my debt, my accrued liabilities, my financial commitments to my children’s education, (for example, I determined my net worth). In fact I did several iterations, including and excluding the mortgaged property, the educational commitments etc. and I came up with what I felt was a reasonable representation of my true state of financial health.

Step 3: TO OWE OR NOT TO OWE: THAT IS THE QUESTION

I recall that one of the EAP counsellors who was hired by the company gave advice that one should never prepay a mortgage. I did not necessarily agree as she did not explain about fixed and variable mortgages, prepayment penalties, notice periods and benchmark rates, so my approach was to look at the returns on my investments, comparing them with the interest rates on all my debt, inclusive of my long term mortgage debt.

I decided that the first debt to be repaid, was my credit card, which bore the highest interest rate: way above that of any of my returns!

The second was a consumer loan which was priced higher than my investment yields, but I kept my mortgage, because of its time to maturity, its annualised interest rate and its terms.

Step 4: AN EMERGENCY FUND

Certainty surrounding the closure of the company centred around the receipt of a cheque. Employment in a position befitting of my knowledge, experience and qualifications remained an unknown, therefore at the time I decided that I would put aside, based on my financial self-analysis, 6 months of mortgage and other living expenses, just in case I became unemployed or did not source any contracts to provide services.

Step 5: AN INVESTMENT DECISION

From the onset, I knew that it would be foolish to plan for any major expenditure, and that investment was absolutely necessary. Fortunately for me, neither friends nor family came knocking on my door for loans or hand-outs.

As I went through the process of calculating debt repayment, contingencies etc., my investment sum worked itself out. At that time, my profession was primarily accounting and finance, and therefore the process of investment allocation, and general investment advice had to be sought from an expert in that core function.

I selected Firstline Securities Limited as the place to invest some of my funds along with another similar institution of solid repute. At Firstline, I was pleased with the manner in which my risk tolerance, investment horizon, expected returns, psychographic and demographic information were all used to determine the portfolio which was best for me. The quarterly statements I received were also very useful.

Step 6: THE DOOR THAT I OPENED

Twelve years of working in finance, treasury, accounting, as well as procedures and audit, brought me to the realisation that my experience and qualifications lent themselves to a new avenue of providing financial advisory, sales and investing services. I have never looked back, but ahead at what that foundation did for me in my current position.

CLOSING TIPS

1. When you receive a lump sum, take a step backward and conduct a financial self appraisal before you make any financial decisions. Take your time and make prudent financial decisions.
2. If you have determined that you have a lot of debt during your financial check up, it would be a good time to introduce budgeting into your plan of action.
3. Never make large one-off expenditures, nor purchases of luxury items which cannot contribute to your income streams in the long run. In fact, they may well add to your list of expenses in the future.
4. If you will be receiving a lump sum pension payment at the time of your severance payment, by dint of your age, it is a good idea to reinvest some of those funds to augment your monthly pension payments.
5. Work out your short, medium and long-term investment goals so that your investment advisor can properly allocate your assets to match those goals and so that you can effectively benefit from capital gains, and compounding. Treat your long-term investments as if they never existed and let your Wealth Manager carefully manage those funds for you.
6. Never run after excessively high yielding instruments with promises of grandeur. The devil is in the detail and many times there are hidden risks and costs and unrealistic projections.
7. This final point is controversial: place a limit on the sum you want to contribute to home improvements and repairs. It may be better to conduct such a project in phases, limiting your expenses so that you do not compromise your ability to invest part of your lump-sum proceeds which can in fact contribute to your income streams either as annuities or variables in perpetuity.

In the final analysis however, do not forget your years of hard work and sacrifice.

It is acceptable to treat yourself and your family to a gift, a trip or something memorable as a well-deserved reward…within reason of course!

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ABOUT THE AUTHOR

Maxine has over 30 years’ experience in the field of accounting and finance, having worked in senior management and executive positions within the Banking, Aviation and Credit Union sectors. Maxine holds a BSc in Management Studies, an M.Sc in Accounting and an MBA. She is a member of the Institute of Chartered Accountants of Trinidad and Tobago.