At some point in our lives, many of us will receive a financial windfall--a large (to us) sum of money that is outside our usual paycheck or investment income. Perhaps we inherited some money. Maybe we won a big contest, or something happened at work and got a big bonus. It is even possible that we "hit" big with an investment (or at the casino) and have decided to cash out. Now that we have this money, what should we do with it?
Build an emergency fund:
If you don't have one, building an emergency fund should be at the top of your list. Everyone needs a cushion against unexpected expenses because people get sick, car and appliances break and sometimes we just need to have a little extra fun. Your emergency fund can be the difference between paying cash for those things or using a credit card and paying obnoxious interest on them.
Put it in your 401k:
This is a good place for money if you have a bad habit of spending whatever is on hand, and need to save for the future. Compare your windfall to your current take home pay. See how much your company will let you put in your 401k over the next six months or year. How much of your paycheck would you have to save to consume your windfall? The idea is to spend your windfall on living expenses and put your windfall into a tax-advantaged account. I did this with the first installment of my inheritance, and it saved me a couple of thousand in taxes last year.
Fund a Roth IRA:
If you want to take money out of a regular IRA or 401k you are going to have to pay penalties, on top of taxes, unless you are over 59. A Roth IRA is different. You can withdraw your contributions at any time, without penalty or taxes (since you already paid the taxes). While your money is in the Roth IRA, earnings are not taxable. If your budget will not allow you to max out the Roth for retirement savings, you can use it for shorter-term goals like saving for a down payment on a house, saving for your next car or for putting away money for the kids' education.
Pay off Debt:
Why wasn't this under (or above) setting up an emergency fund? Because not all debt is horrible and I think getting a savings/investment plan in place is more important than paying off your house or a car that you have financed at a reasonable rate. On the other hand, credit card debt can be debilitating to your efforts to get ahead in the world, and unless the interest rates are very low, student loans need to be disposed of as soon as possible; otherwise they can limit your ability to move on with life.
Treat Yourself:
If you don't owe money (other than a mortgage or a low APR car loan), have an emergency fund and are actively saving for retirement, spending part of your windfall on something nice for yourself (whether that means a vacation, a new(er) car, a new phone, or a fancy dinner out) can make you happy and if money can't buy a little happiness, what's the point of having it?
Give it Away:
Since this is money you did not plan to receive, it is money it should not hurt (too much) to give away. Our world has many needs and I'll bet one of them is your passion-whether it is your church, the local society for the arts, the animal shelter, Ronald McDonald house or hospital. Generosity is an American tradition, keep it up.
If I received a windfall, I would split it between a buying a home and retirement savings. Sadly, I don't imagine this ever happening!
ReplyDeleteI used to use windfalls for fun stuff (down payment on a new car. or just video games and stuff). Now they go toward bulking up the emergency fund and investments, though I'm tempted to start moving them to paying off the mortgage faster. Sure wish they'd gone to that earlier.
ReplyDeleteI am so glad you mentioned charity in your list. While it's great to tighten up your finances or to treat yourself if they're already managed, we shouldn't forget about others in need when we are able to help.
ReplyDeleteGreat list, I love that debt isn't at the top because there are things that can and should come first such as having an emergency fund. I also agree that credit cards should be paid before most other things because, speaking from experience, they can be very difficult to deal with.
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