Lucky you - your parents have decided they're giving you an early inheritance: a six-figure sum at an age when you can really make the most of it. The temptation is to splurge away - a luxe overseas trip, new statement tote bag, even maybe the shiny black BMW Roadster that's always been way out of your league...
While a lash-out is definitely in order to celebrate your windfall (buy the really good champagne) - this is serious money, so maybe you should get a little serious about how you spend it.
Assuming the sensible you takes control of the cash, you might think about paying off your credit card debt. Paying high interest on your credit card when you don't have to, it could feel like throwing your money away.
You have some decisions to make. While your instant reaction might be to look at investment property, if you've already bought your home you may think about paying down that mortgage or boosting your super.
Pay into super or your mortgage?
Moneysmart has a calculator* that can help you work out which option could be better for you, based on your potential long term financial gain, taking into account tax and interest rates. Enter your salary, your mortgage, the amount of the windfall and the calculator tells you which one could work for you.
Say you enter an annual salary of $85,000 and a $400,000 outstanding mortgage on which you're paying interest at p.a., with a 20 year term remaining. If your windfall is more than $125,000, then the calculator suggests you might consider paying off your mortgage - whatever your age or life stage, assuming you retire at 65 years of age.
However, if your parents are gifting you less than $125,000, then according to the calculator, the pendulum swings in favour of sinking the money into your super as an after-tax contribution. Your money in super could compound over the years, leaving you financially better off at age 65.
Sure it may seem crazy to lock up your money for 20 or 30 or years, especially if you think you may need it sooner. But once you retire and are aged 60 or more, any withdrawals from your super are tax free.
No windfall? You've still got options
If there's been no early inheritance in your life, but you're able to squeeze some savings from your salary, then you should still toss up the mortgage versus super question.
If you choose super, then you could contribute from your before-tax salary (using salary sacrifice) and only pay 15 per cent tax on the contribution. That means you have 85c in the dollar working for you in your super. If you opt for the mortgage then your money would already have been taxed at your marginal tax rate. So if your marginal tax rate is 39 per cent, you would only have 61c in the dollar to pay off your mortgage.
"The higher your marginal tax rate, the more attractive the superannuation option becomes because you lose more tax taking that income as salary before you can pay off the mortgage," says Melinda Howes, BT's General Manager, Superannuation.
Of course there is no guarantee that the super rules on lump sum payouts will still be the same in 30 years' time but, as things currently stand, it may be a strategy worth considering.
In the end it really depends on your individual circumstances. An experienced financial planner can ask the right questions and help you work out which strategy would be best for you.
*The MoneySmart calculator assumes a retirement age of 65, inflation running at 3.5 per cent a year and superannuation earning 7 per cent a year after tax and fees. Use the 'How It works' link on the calculator to see the other assumptions that have been made.
This information is current as at 30/06/2015.
© BT Financial Group 2015.
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.
These calculations are predictive. Whilst we have used every effort to ensure that the assumptions on which the calculations are based are reasonable, the calculations may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these calculations.
Superannuation is a long-term investment. The government has placed restrictions on when you can access your preserved benefits.
The Government has set caps on the amount of money you can add to superannuation each year on a concessionally taxed basis. In addition, the government has set a non-concessional contributions cap. For more detail, speak with a financial adviser or visit the ATO website. Depending on your fund, there may be a fee for accepting rollovers. Before requesting the rollover, you should also check with your other fund/s to see if there are any exit fees for moving your benefit, or other loss of benefits (including insurance cover and loyalty benefits).