After the heartache of losing her mother to a protracted battle with cancer, Claire had some difficult choices to make. What would be the wisest way to spend her inheritance?
In two minds
She was torn in two – should she pay off all her debts and carry on with life or honour her mother by doing something they had both dreamed of for years? She worried that the inheritance of R700 000 would not be enough to do both. Her mother believed in enriching her daughter’s life by giving her all the opportunities she could. She always encouraged her to dream and actively pursue the things that are on her bucket list.
I asked Claire what she had always wanted to do, for herself, that she would not ordinarily be able to do. She told me she had always wanted a new car. She also told me that her mother and herself had dreamed of one day going to Israel together.
Was there a way that we could deal with Claire’s most pressing debts AND allow her to celebrate her mother?
Claire’s financial situation
I asked Claire to compile an inventory of all her debts, but not to stop there! She needed to find out what the interest rates were on each of these debts. This is what she came back with:
- She owed R200 000 on her bond at 6.5% per annum
- She had credit card debt of R20 000 at 14% per annum
- She had gone to a money lender who loaned her R40 000 at 18% per annum
- She still needed to pay off R4 000 on her car loan at 16%
The above come to R264 000.
I asked about her dreams and to calculate what a new car and a trip to Israel would cost her. She reported back as follows:
- The car she wanted most would cost R250 000 if she paid for it in cash
- A trip to Israel would cost her about R70 000
This would include:
- An inclusive tour by Trafalgar
- Sufficient spending money
The cost of meeting her dreams would therefore come to R320 000.
The plan we settled on
As a rule of thumb, I always suggest that clients pay off their debts as soon as possible. However! They do need to take it a step further. Just because they now do not have to budget for the repayment of their debts it does not mean that they should stop budgeting or think about the future.
I want my clients to accept that budgeting and saving is not a punishment but instead will help you do some of the things you dream of without having to pay for it for years afterwards. This will help you to stay motivated.
She agreed to settle all her debt. She could then buy the car of her dreams. The trip to Israel would make many good memories that would help her deal with her mother’s passing.
There is more
She would also be able to sell her current car or trade it in when she buys the new one in cash. The R120 000 amount left of the inheritance plus the money for the sale of the car should go to her emergency fund.
Since she would not be paying a large portion of her salary towards servicing debts, it means she will have more money in her pocket. It would be tempting to see this as extra spending money on entertainment and luxuries.
I suggested to her that she takes a disciplined approach. She should budget for a realistic amount that she will add, every month, to her emergency fund. She could even set up a debit order so that she would not even have to think about it!
She should do so until she has enough to put down a deposit on a second property. She would then be able to rent it out – in other words – set up a passive income for herself. The income would pay for the property and provide continuous income throughout her life. The income as well as the value of the physical asset would make retirement more secure and comfortable as it would supplement her pension.
Claire was surprised that she could meet both her wishes to honour her mother’s memory AND service her debt. Not only that, she also now has more money available to build on her emergency fund. This would also honour her mother’s wishes about providing opportunities and safety to her child. A Financial Advisor can help you, like I did with Claire, to consider all your options.