By Abulela Gazi
THERE have been many instances where people have received large sums of money from an insurance payout and have blown it all unwisely.
The TV series I Blew It shows a few examples of this and many have experienced this first-hand or seen family and friends go through the same. When there is little to no financial literacy, the chances of bankrolling a few good times and leaving nothing for later is probably higher than investing in life, disability, or critical illness insurance payouts wisely.
While television series of this kind provide a kind of self-deprecating mirth at how easy it is to lose R20 million in just a few months, it’s also easy to sense that money lulls people into a sense of invincibility that cannot be further from the truth. According to research by a psychological support group, money doesn’t give or create real security in our lives. Rather, it provides feelings of validation, power, and control – a false sense of control that we have for the short time we can wield all the money we never had.
The best thing to do when you receive a lump sum in insurance payouts is to hold onto it before making any significant financial decisions, such as selling your home and buying a yacht.
While it may be tempting to do just that, remember that the money you receive is meant to be in lieu of the salary that has been lost through a loved one’s death or your inability to work.
Keeping a portion of the payout in cash will allow you to cover bills and other pressing financial needs. Saving that money needed immediately in an account will incur fees and might, over time, cost you more. Instead, consider putting the payout in a high-yield savings account to earn interest on the balance.
If the family breadwinner passes away or becomes unable to work, set aside more in an emergency fund to keep the family afloat financially as others search for jobs. You can simulate a monthly salary by setting up debit orders from a savings account into a cheque account. That way, the temptation to splurge is alleviated.
Understanding the financial choices, you can help avoid situations where you make instant gratification purchases, with that payout having little thought for the future.
While it may seem like a wonderful idea to get that Ferrari you always dreamed of, it will only provide joy and comfort for a short-term and can’t see you through the rest of your life.
Abulela Gazi is a Metropolitan representative.
PERSONAL FINANCE