Everybody dreams of getting a surprise bundle of money, but getting a sudden large sum can turn into a problem. If you don’t think and plan carefully, you might spend the money quickly without using it wisely. Whether you’ve inherited money, received a big bonus at work, or won the lottery, we have some tips to help you deal with your financial windfall.
Start by putting a hold on spending
When you get a bunch of money unexpectedly, it’s tempting to go out and spend it all at once. But that’s not a good idea. Instead of buying new stuff or going on a fancy vacation right away, put the money somewhere safe, like a savings account. Give yourself some time to think about what you want to do with it.
Take a few weeks or months to figure out your short- and long-term money goals. For example, maybe you want to save up for your kid’s college, but you also have a lot of high-interest debt to pay off. It’s important to know what’s most important to you financially and how the money can help you reach those goals.
Boost your emergency savings
If you don’t have any savings, getting a bunch of money all at once is a great chance to start an emergency fund. It’s like having a financial safety net for when unexpected things happen. Some experts say you should have three months’ worth of expenses saved up, while others say it’s better to aim for six to eight months. The right amount depends on things like how much money you spend each month, your income, job stability, and family size.
When you’re looking for a place to keep your money, find a savings account with the highest interest rate and the fewest fees. That way, your money can grow a bit while staying safe.
Get rid of expensive debts
If you owe money, especially on credit cards with high-interest rates, it’s a good idea to use your unexpected money to pay off those debts. For people who are paying a lot in interest every month, it can be better to get rid of those debts. Instead of just putting the money in a regular savings account doing the other way around is best.
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If your windfall isn’t enough to pay off all your debts and still save, focus on paying off the ones with the highest interest rates first. Also, set aside some money for emergencies. If you pay off all your debts but have no savings, you might end up in debt again if you have to borrow money for unexpected expenses.
Think about the future
If you haven’t been saving for retirement, this is a great time to start. You can use your windfall to open a retirement account like a traditional or Roth IRA. This is a good way to add to your savings, especially if your job doesn’t offer a retirement plan like a 401(k).
If you’re already saving for retirement, you can use the money for other important things. For example, you could pay off your mortgage, try investing, or start a business. But be sure to think about the pros and cons before making big decisions.
Give wisely
Once you’ve sorted out your money matters, you might want to help others. Before giving money to friends, family, or charity, think about who you want to help and how they will use the money. Consider any financial consequences as well. For instance, if you want to give money to your kids for a house or college, be aware of the tax rules.
If you’re giving to a charity, research it first to make sure it aligns with your beliefs. Check if they’re legitimate before sending money. The IRS has a free online tool to verify tax information for qualifying charities. If you make a big donation, get a receipt for tax purposes.
The key to making your windfall last is to take your time and think through all your choices. Once you have a plan, you can use your money wisely.
