Having a huge lump sum of money comes with a unique set of issues and challenges. You might have inherited it, won it, or got it from the RAF or other means. Handling money that you are not used to handling can be very overwhelming. The best thing to do is to make smart financial decisions before its too late. This is the best way to invest a lump sum of money in South Africa.
You will be tempted to spend a huge chunk of money, to buy that AMG A45 you have always wanted. Spending your money this way may bring you joy but you will have some regrets down the line. The smart thing to do would be investing your money and buying that AMG with yields from your investments.
1. Pay off your debt
Debt is the number one reason why young adults don’t have financial freedom. It’s very hard to build wealth as a young adult with bad debt. The first thing to do is to pay off all debt. Pay off your student loans, pay off your vehicles, credit cards, overdrafts and everything else.
The one debt that you can leave on this list is your mortgage debt, that’s if your mortgage debt is more than 30% of your lump sum. But if your mortgage debt is less than 30% then you should pay it off. If you have R5million and your mortgage is R1.2million then it makes perfect sense to pay it off.
Paying off debt is actually an investment in your future as it will free up a lot of money for you down the line. This additional money can be used to invest in more assets or be used for leisure.
2. Invest in bonds
Bonds are such a safe investment asset that you could even quit your job to live off the money that you get from bonds. What separates bonds from other investment assets is that you will get fixed income, the income fluctuates with other assets.
A bond is a form of debt-based financing where a government or a corporation raises money by selling debt to the public. The government always needs additional cash to fund mega projects like building power stations. As an investor, you lend this money to the government and they pay it back with interest, this interest is paid twice per year.
The same goes for corporations, government bonds are the safest but have a lower interest, with an interest rate of up to 7% while some corporate bonds have interest around 11%. This might not seem that much, it’s usually not that much if you have only R1 000 to invest but it becomes a lot when you have over a million Rands to invest. It’s important to remember that this interest is paid out twice per year.
Let’s say you take R2million and invest it in a 7% yielding government bond, that’s an interest of R140 000 paid out twice in a year which takes it to R280 000. You can either reinvest this money or use it as your salary should you decide to quit your job because it becomes R23 000 when you divide it by 12 months.
The timeframe for bonds may span well over 10 years, so this means you will get this amount for the next 10 years, or more if you invested in inflation adjusted bonds. This is just free money, your principal amount of R2million will remain untouched.
Invest at least 40% of your lump sum in bonds, especially if you have a lot of money.
3. Diversify your investments
Bonds are a stable way to produce fixed income but will not really double your money. There are riskier ways of investing which can double your money or come close to it. The most popular one is buying stocks with the aim of reselling them and not really waiting for dividends.
Some company stocks shot up over 150% in the year 2020, especially tech companies. This might have doubled your lump sum, but it’s important to know that risk goes hand in hand with reward. You can just as easily lose most of your money while trading equities, especially if you don’t know what you are doing.
Another popular investment is real estate, over 80% of the world’s millionaires made their money from real estate. Real estate is a very safe investment, it’s also one that will replace the income from your job should you decide to quit. There are a lot of other investment assets that you can buy to diversify your portfolio. I would advise you to spend around 30% of your lump sum in this area.
Conclusion
The lump some of money that you receive should go towards making your life easier and stress free. You can do this by investing in a few assets that will give you financial freedom. This was a guide on how to invest a lump sum of money in South Africa. Do you have any thoughts or questions? Comment below.
