Weighing the best options for a €100,000 windfall
As great as it sounds, a surprise windfall of €100,000, which is a lot of money in anyone’s book, won’t enable you to retire early and go and live on a exotic island.
Once the initial euphoria settles, prudence might be the best approach which must involve avoiding the temptation to buy the Ferrari.
So let’s consider the options.
What you do with the money will depend on the stage of your financial life?
For those starting out and looking to buy a house, this sum would prove very useful to provide a deposit for a new home.
The average house price in the Republic is around €230,000 and €368,350 in Dublin. That €100,000 windfall would provide over a quarter of the purchase price, even in the capital.
The monthly repayments on the remaining amount of €268,356 would be an affordable €1,087 a month over the next 30 years.
For people who already have mortgages, paying off €100,000 from the loan would be a reasonable option. It is the equivalent of at least 1.26% gross return on the money, which is a lot better than the risk-free rate of interest in the banks.
This would be the rate for borrowers fortunate to hold a tracker mortgage of 0.85%.
If you were on a higher variable or fixed rate of say 3%, then the gross required annual return rises to 4.47%, which is a considerable target to reach.
Some might consider using the money to buy an investment property. However, €100,000 is not going to help secure a second property, apart from Longford or Leitrim where the average price of a house is €120,000.
The drawback of paying off some or all the mortgage is that the money is gone and isn’t going to be available for anything in the future.
People with a windfall have to assess the opportunity cost of paying off the mortgage.
Or, the money could be used for the pension pot. The State pension is now 68 years for citizens born after 1960. The State pension is around €12,900 a year, which implies a hefty fall from the average Irish salary of €45,075.
Given that less than half of Irish workers have any sort of private pension, the situation can but get worse.
If you were to invest this money in a pension, you would need to spread this money over several years to apply with the annual cap on the amount that can be put into a pension.
Over four to five years, the money could be invested in a tax-free fund until the retirement date.
Company owners have much more freedom to pay into a pension.
The €100,000 could be used to fund children at college.
It costs an estimated €20,000 to €33,000, to put a child through third level education, depending on whether they are living at home.
With three children, the €100,000 could be easily soaked up.
With regards to investing this money, diversification is often overlooked. Too many of us want a get-rich-quick scheme.
I am often asked about what is the next big thing and we have seen the bubbles of the banks shares and Government share floatations and even cryptocurrencies where some have got badly burnt.
This is as a difficult time to make money as I have ever seen.
The buzz word volatility has been used over the last few months, which means that the up and down movements of market prices are happening more frequently.
One of my favourite quotes is from the world’s most successful investors, Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.”
My personal view is people are getting greedy again and thus diversifying and spreading risk across different asset types is really important as is getting proper advice.
My suggestion for anyone fortunate to come across any sum of money is to consider all the options and to strike some sort of balance.
This could include repaying part of the mortgage, increasing the pension pot, and putting some funds to children’s education needs.
