What will you do if today you get a windfall. Not necessarily winning the lottery, but getting thousands of dirhams in a bonus, inheritance, or the like.
If you’re debt-averse, you may rush to pay off your debts, which is admirable. But sometime it is better to save and invest a bit, even if it means keeping some long-term debts like home mortgage and car payments.
The reason is: home mortgage, car loans and similar long-term debts are relatively low interest. If you run out of cash and use your credit card, you will be slammed by very high interest rates. So the security of having cash on hand is something to keep in mind.
In addition, relying on credit cards for emergency is OK until you begin to miss payments, and the bank freezes your card. So here is one more reason not to run month to month on your pay cheque and try to save as much as you whether in savings schemes that are accessible, or long-term investments that can be cashed if needed.
Here is how you should consider your priorities.
Checking your savings cushion
Having some cash available for an emergency is invaluable for your peace of mind and financial health. So before you rush to buy something nice, book a vacation abroad or splurge on family and friendly, make sure that you have a comfortable cushion of savings.
How to define comfortable? Typically, your savings should cover your expenses for about six months if you don’t have income. Think of a situation where you lose your job and become unemployed for That is a lot of money, right? So yes, channel part of all of your prize to savings or investments.
Checking high-interest debts
If your debts are spiralling out of control. Paying off your credit cards can be a high priority — even higher than saving. Financial health is unachievable if interest is added to your debts every month. If you have any other high-interest debt like personal loans, consider refinancing or paying part of it down, if you’re confident of your savings and ability to stay afloat if a crisis hits.
Buying cash
Assuming you’re doing great: you have a big comfortable cushion of cash in the bank, your investments are thriving and you’re keeping your debts low, you can now say cash is king. You can use this cash as a leverage to negotiate a much better price on a car or any other big item that is typically financed and loaded with interest.
In addition, buying cash means there are no strings attached. You don’t have to worry about missing payment or adding to your overall debt-to-income ratio. So take this exceptional opportunity to buy something in cash.
Consider retirement and tuition
Adding a chunk of cash to your retirement or children’s college fund is a great boost. You might think that with your current contributions, you will be in a good place. But that is based on your current income and ability to save. If you lose your job or have to draw part of your savings, your retirement may become at risk.
So think about the long run. A windfall is unlikely to happen often, so don’t rush to spend it all. Securing your future during old age as well as your children’s future and education isn’t just wise, it is also a way to allow yourself to focus on the future and make decisions that could cost you money — like changing jobs or taking a sabbatical — without being crippled by the need to make money for now and the future.
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
Getting a windfall
Keep your long-term, low-interest debts
Make sure you have enough savings
Get a deal when you buy cash
Invest in your retirement or education
— R.O.
