I have $x, what should I do?

A very common question in r/ausfinance is : “I have $x, what should I do with it?” This FAQ seeks to address this through general financial planning steps, the personal finance flowchart, and some conventional wisdom. You should still think about how this FAQ fits with your personal circumstances.

Whether it be a large tax return, an asset sale, inheritance, or something else, most of us recognise the importance of taking up opportunities when they arise. We have the desire to make wise choices and have the funds work for us, but worry about making a poor decision.

How to allocate the lump sum? Pay down debt? Save? Invest? What to invest in?

The Personal Finance Flowchart

This is a fantastic place to start, and summarises a lot of what is discussed below:

First: Do a budget.

The foundation of your personal finance is having a robust budget that is realistic and disciplined. If you’ve never prepared a budget for yourself, now is the time to learn.

Fundamental to having control over your finances is knowing where your money is going. Budgeting gives you clarity for both your income and your expenses, which can then help you address your surplus (or shortfall). There are many ways to budget successfully – to explore this further please visit the dedicated FAQ entry for this: budgeting.

Second: Pay off your high interest debts (credit cards & personal loans)

Full article: Debt repayment

You’ll need to clear any high interest credit cards or personal loans before you start any long-term savings or investments. Learn about the ‘avalanche’ or ‘snowball’ methods (discussed in the debt repayment article above).

Third: Build an emergency fund

An emergency fund should be a liquid sum of money in a savings account, that you only touch for unexpected emergencies. You should initially build up a fund of at least 1 month of expenses to fall back on. This is a “small win” and will help build resilience, and reduce the chance of relapsing into increasing debt to deal with emergencies.

Your goal should be an emergency fund of 3 to 6 months of your household/living expenses. A larger emergency fund (e.g., 9 to 12 months) may be warranted if your job is uncertain or you are self-employed.

See the MoneySmart article on emergency funds.

Fourth: Consider your employer’s super contribution matching and Government super incentives.

Learn more about Superannuation here. Learn about the Government Co-Contribution, and use the ATO calculator to work out what you might be entitled to.

If you’re entitled to superannuation contribution matching offered by your employer, you should certainly take it up.

If you’re self-employed you will need to arrange your own superannuation contributions. This is a higher priority than it would be otherwise. On the plus side, it’s possible to claim tax deductions for your contributions.

BE AWARE: Any money you put into superannuation will be preserved (unable to be withdrawn) until retirement.

Fifth: Save for larger goals and expenses

Click here to use the MoneySmart savings goal calculator.

Buying a house is often top of the list of priorities people have. Generally speaking, if you plan to buy a house in the next five years, any funds you intend to put towards this should probably sit in a savings account. Whilst the stock market may look attractive, this is too short-term a goal for the risks to generally be worthwhile.

This is with the notable exception of the First Home Super Savers Scheme (FHSSS). The FHSS scheme allows you to save money for your first home inside your super fund. This will help first home buyers save faster with the concessional tax treatment of superannuation. For more information about this see the ATO website linked above, or the r/ausfinance wiki page linked here.

HECS compounds at a very low rate compared to most other forms of credit. While there is no interest payable on your HELP debt, indexation is applied in line with changes to cost of living. In 2020 the indexation factor was 1.8%. It’s unlikely that paying back HECS early will be the best use of your funds.

Sixth: Increase your Superannuation Contributions

Once your short and medium term savings goals are under control, you should think about your capacity to add additional funds into superannuation. Super is an excellent way to save for retirement due to the concessional tax treatment it enjoys. There are a number of dedicated r/ausfinance wiki entries for each age group to help you tackle this item. There are online calculators to help you work out what you might need for retirement, and how much you should be saving now to achieve your future retirement goal.

BE AWARE: Any money you put into superannuation will be preserved (unable to be withdrawn) until retirement. If you think you will want access to the funds before retirement you should skip this step.

Seventh: Invest and Save for other long term goals

Next you should look at your long-term savings plans. This is where you can think longer term and more aggressive investments.

Superannuation is a valid way to save and invest for the long term, particularly for early retirement goals, but if you have long term goals that you anticipate wanting to achieve before retirement, you should start to think about developing an investment plan.

For goals that have a shorter timeframe (eg < 3 years) you should still just use cash based investments and savings accounts.

For the medium term (3-5 years) an investment portfolio with a more conservative mix of investments such as shares and bonds would be suitable.

For longer term goals (7+ years), you can consider investing more aggressively, focusing on primarily share based investments.

That’s the basic list you should be going through in order to determine where you put your sum of money. You may have compelling reasons for rearranging these steps as you see fit, but try to understand and appreciate the implications of doing so.