'Day one' cash - what should I do next?

What you need to know

Receiving a large sum of money might tempt you to think that life will be plain sailing from here on. But amid the excitement, it's also common to feel overwhelmed or fear that this wealth will become a burden, particularly if it's unexpected.

Many important questions will be swirling round your head. Should you save or invest the money? Is there enough to retire early? How much can you share with friends and family?

Before making any big financial choices, however, you should first stop and take a breath. Consider your options properly, rather than rushing into a decision you may later regret. As the Genevan philosopher Jean-Jacques Rousseau reportedly said: "Patience is bitter, but its fruit is sweet."

Protecting your cash

Whether your new-found wealth is from the sale of a business, an inheritance or a sudden windfall, your first question will usually be the same: how do I keep my money safe?

Holding large cash reserves can be risky. The Financial Services Compensation Scheme (FSCS) only protects up to £85,000 per person – or £170,000 for joint accounts – per financial institution.

In other words, if you keep your lump sum in a single account and the bank collapses, you could potentially lose a significant sum of money.¹

Choosing the right option

A range of low-risk, short-term investments and private banking services are available if you’re looking to find a temporary home for your cash while you formulate a long-term plan.

Preserving and growing your wealth over many years is the ultimate goal. However, most cash savings accounts offer interest rates that run well below inflation, meaning they are only ever a short-term solution.

But while holding cash is short term, it is a decision that deserves some focus. Here are some of the options available.

Fixed-term deposit accounts

A fixed-term deposit account usually offers a higher interest rate than an easy-access savings account, with the caveat that you usually won't be able to access your money for a set period of time.

The interest rate is fixed for the duration of the term, which can be anywhere from one month to several years. However, you are told exactly how much money you will receive when the term expires, giving you greater certainty over your future finances.

Fixed-income investments

There are many types of fixed-income investments, although government and corporate bonds are the most common.

When you buy fixed-income investments, you are essentially loaning the issuer money. In return, you receive periodic interest payments until the investment matures, at which point you also receive the initial investment back.

The duration of fixed-income investments varies considerably. Some mature in just a few days, while others can take decades, such as the 30-year US Treasury bond. Nevertheless, bonds backed by strong governments are very low risk.

Gilts

UK government bonds are called gilts. Conventional gilts function much in the same way as other fixed-income investments, with interest payments – known as 'coupons' – typically paid every six months. The initial investment is returned at maturity.

An option for those worried about the impact of inflation are 'index-linked' gilts, where the coupon and principal payments are adjusted in line with inflation.

Gilts also offer tax benefits for UK taxpayers, as profits earned when they are sold or reach maturity are exempt from capital gains tax.

Treasury bills

Treasury bills, also known as T-bills, are a type of fixed-income investment issued by the US and UK government. They have short maturity dates, typically ranging from four to 52 weeks, although the minimum maturity duration is one day.

Unlike Treasury bonds, T-bills do not pay a coupon. Instead, they are sold at a discount to their face value. At maturity, you receive the face value of the T-bill – the difference between this figure and the amount you paid is your investment return.

Liquidity funds

A liquidity fund is a mutual fund that invests in short-term fixed-income securities, including T-bills, certificates of deposit and commercial paper, which is a short-term debt issued by a corporation.

Because these funds only invest in securities with a maximum maturity of 91 days, they can be an efficient place to park surplus cash for short periods of time, while potentially delivering returns beyond that of a traditional bank account.

As the name suggests, a liquidity fund is also beneficial if you want quick and easy access to your money, with many providers offering same-day redemption. Rothschild & Co works with a trusted partner to allow our clients to access liquidity funds.

Beyond ‘day one’

After receiving a large cash lump sum, it can be hard to look past the here and now but it's important to ensure that your money is managed effectively to secure yours and your family's finances for the years, decades and even generations to come.

We believe in investing your money in a portfolio of high-quality companies and funds to preserve and grow your wealth over the long term, as well as providing sufficient cash to meet your day-to-day needs.

We do this by investing in a range of return assets, which are mostly shares in companies and specialist equity-related funds, that we believe will outpace inflation. We also hold diversifying assets, which are intended to perform well when there is a downturn in markets and return assets are weak.

Speaking to a wealth manager can help you put together a plan that's right for you. To hear more about how Rothschild & Co can support you – on day one and beyond – please get in touch.

[1] The FSCS offers protection for ‘temporary high balances’ of up to £1 million for six months. This is to cover to scenarios including receiving inheritance, being divorced or selling certain assets. Temporary high balances, FSCS.

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