In my article, I detail my decision process on investing a lump sum windfall payout from my redundancy. I was fortunate to get a new job shortly after getting the payout, so I didn’t technically need the money. With a full emergency fund and healthy pension, I had to think carefully about what to do with my money. Here’s what I did to decide.
The lead-in to my lumpsum
As you may or may not be aware, my redundancy was in May 2020 and I spent until 31 July 2020 on the government’s furlough scheme. For those not aware of what furlough is, the UK government decided to try and prevent mass and sudden unemployment by offering to pay up to 80% of employee’s salary up to £2000 per month. The employer puts the employee on extended leave and the government picks up the tab for their salary.
As I work in real estate and construction consultancy, our industry is very vulnerable as investors will inevitably pause projects during periods of uncertainty. As a consultant, it is easy to terminate any work that is going on. The brakes of the economy slammed on and in April 2020 my company, panicked. They were burnt during the 2008 great financial crisis and thought it best to ‘take action to protect the firm’. As it was a partnership, this meant protecting the partner’s income. Why should they suffer any hardship whilst the employees who brought them fortunes in the good times could be fired?
I found myself pushed out of my project by more favoured employees and given the chop. This was very annoying.
12 May 2020 was my last day working.
In fairness to the company, they offered me my notice period (contractually three months), and a month’s salary tax-free. They also had to pay me the holiday I was entitled to up until September which would cover my notice period. I also got to keep my private health care until then.
The total settlement was in the range of £33,000. I couldn’t believe it. It was a good payout, so I decided to take it and not kick up much of a fuss. The only thing I was concerned about was getting a good reference which I got from my boss.
I sat and waited and took up the offer to extend my furlough by a month. The payment finally landed on 30 July 2020. After-tax and pension deductions, it left me with £22,000.
I had applied for dozens of jobs, and had two good leads in an area I wanted to move into. After following up a couple of time, I got an interview and got the job. Same salary as before with lots of room to grow.
I had various ideas about how to invest my lump sum money and as I’ve never had such a massive windfall in my life, so it was not something I was used to. I needed to use it for something unique.
Initially, I thought ETFs were the way forward and I assumed I would do that. However, that did seem rather dull, and I thought I’d do a little bit of creative thinking.
The fantasy project
Firstly, I made a business plan to start a brewery, which was more a fantasy than a reality. However, this may still happen at some point. I like beer and want to make it. I realised that investing the lumpsum money into that while unemployed was probably too risky for me, especially during a pandemic where no one could come to, or use the brewery. I’ve put this plan on ice for now, but I may resurrect in the future.
The long wait for the money continued.
I then looked into investing the lump sum in real estate. I did the maths regarding the tax and mortgage relief, making a massive spreadsheet which I could quickly assess the income I’d make. Input the details of the property and see. The plan would have been to buy at an auction and renovate then re-mortgage. However, weirdly, the returns just didn’t seem to add up. The time for buy to let has passed in this country sadly. Once I have enough capital I think money can be made from property development. I will relook at this once I have more money.
What struck me when observing the prices people paid for a property is that they would be sure to lose money in the short term. I think there is a misconception because people believe making money in property is guaranteed.
Due to the value of my lump sum, it made a relatively low budget for property so, I looked at some properties up for auction in Liverpool. There were some attractive prices in Liverpool where I could have bought some excellent condition flats for around £30k. The problem was that I don’t know that city at all, so it felt really like a stab in the dark. I do think it would make a high return as the rental would produce about £6k a year and I would have no mortgage so would not be affected by the tax relief issue.
I’m glad that I did the math to work out accurately what the returns were as I was able to rule this out for now. One for the future as I think there is opportunity in the low cost property market. I didn’t feel comfortable starting investing without a main income so put this option on ice.
Buy to let analysis
The below is the output of my spreadsheet which, in this case, works out the annual return on a property in London which I believe was a two-bed flat in North London which I could have bought at auction and then rented out. I looked at combining the lump sum with equity from my current property get the deposit together.
As you can see, because there is no tax relief on the mortgage payments, the return is negative if I do it as a sole trader and only 1% as a company. This is madness! You are relying on the increase in property value to make any return, and right now, I don’t see that going up much.
Spending my money!
After getting my money, I must admit I felt an overwhelming desire to spend the lot on a nice car rather than investing my lump sum. There I admit it! I can be weak. I started looking at beautiful cars on Autotrader and the like. So shiny and tempting but a little spark came to stop me making a big mistake. But here’s what I did anyway.
I don’t have a car at the moment since I sold it in September last year. I don’t miss it most of the time, but lockdown and COVID 19 in London have meant I would like a way to escape the city that isn’t public transport.
So I started looking at more modestly priced cars around the £10k mark. Not too old, but not too new. Being a FIRE person, wisdom says I should buy an old Japanese car for a sensible price and with a small engine. My love of cars and the fact I get a great deal of pleasure from driving and owning a car means I don’t know if I could respect myself driving one of those vehicles. I think looking at good quality German cars which are around 5-8 years old as they are well made and abundant in the UK makes sense. They also hold value reasonably well.
To get the car I want, I’d need to spend about £15k. I thought about getting a loan to do this as finance is cheap at the moment. I then dismissed that idea as I didn’t want to spend £15K or get in debt.
By this point I’d realised I would spend about £2k on living expenses, and £2k on other things, leaving £18k to play with.
So again, I did a spreadsheet and decided that no, this is also not optimal. After looking at depreciation and any potential finance costs (if I went that route) was sobering. Doing the maths makes it much easier to make a rational decision.
The table gives a comparison between borrowing money to buy an £8k car and investing the remainder vs investing the whole amount of £18k. After three years I end up with nearly £5000 difference accounting for depreciation.
Investing the lumpsum
So now I’ve dispelled other mad things to do with my money, I’ve come full circle to merely investing the lumpsum in an ETF.
The next decision is whether to put it into my SIPP or ISA. I may need this money before 55 to either put down as a deposit on a house or for other reasons, so ISA made sense. It pained me to give up the nearly 50% tax gain of putting it in my SIPP though.
I had some concerns about investing at this time only due to the real uncertainty surrounding the COVID 19 situation and potential for lockdown number two.
The S&P 500 has recovered since the massive drop, but who knows how long this will last? There are lots of indicators that this is a bubble and it may pop soon enough. People believe the Fed printing money is what is keeping the markets up. Works for me I guess and everything else seems to be a bad move at the moment.
On the other hand, I’ve I’d invested four months ago, I’d be laughing now. So again, time IN the market beats timing the market.
What I did in the end
I chose to invest £8k into the S&P 500 ETF, and then also £10k into the NASDAQ 100. Having not been exposed to US tech much other than those in the S&P500, this seems like an opportunity as I believe the world will become more dependant on tech for working at home etc.
I ruled out individual stock trading as I really don’t have the time to study companies properly.
It’s funny; the FIRE movement always recommends using low-cost ETFs to invest. I tried to think outside this box when deciding on investing a lumpsum but eventually made my way back to ETFs for investing. For the long term, it works, and that’s what I’m investing for.
The eventual allocation of my £22k was
I could have saved a lot of time going straight to ETFs, but I enjoyed playing around with the numbers. I have some ideas on how to invest in the future now too and some awesome time saving spreadsheets. Time well spent.