HOW I MADE THE MOST OF MY LUMP SUM

A Firstline Securities Limited Blog by: Maxine King

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 for 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^st of that same year. In retrospect, it was a traumatic time of self denial, where I felt I was keeping it all together and handling it well, until I received my “letter”. I must admit that I was surprised at the sum, but at that point all my thoughts conflated. 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. Become an independent contractor or accept the employment offer of the new company if and when it happens?
4. Provide for medical contingencies?
5. Use some of the funds as a Transition or Emergency Fund should I become unemployed, and if so, how much?
6. Immediately look for avenues of sustainable income such as short-term contracts?
7. 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.

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, 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.

The first debt that I decided had to be repaid, was from 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 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, so 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 land any contracts to provide services.

Step 5: AN INVESTMENT DECISION

At onset, I knew that it would be foolish to plan for any major expenditure, and that investment was absolutely necessary.

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 institution of solid repute. Both places have not failed me.

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 financial advisory, sales and  investing. I have never looked back, but ahead at what that foundation did for me in 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, so that you can properly 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.
7. This last one 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 severance 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 or your family to a gift, a trip or something memorable as a well-deserved reward…within reason of course!

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.

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