Cha-ching! Out of nowhere you suddenly have money that you weren’t counting on. Whether it’s an inheritance, your tax return, winning the lottery, or getting a bonus at work, handling a windfall responsibly is important to make sure you don’t squander your dough on something useless.
How many stories have you read of lottery winners who win large sums of money only to end up dirt poor down the line? It’s hard to fathom how somebody could just lose millions of dollars. But not having and sticking to a plan for windfalls – even the most modest of them – will almost guarantee that you’ll end up in the same boat. And the time for making that plan isn’t only when you get it – having an idea of how you’ll allocate your new-found money before you get it will help make the process easier, too.
Here are three perfect ways to handle a windfall of any size that will help keep you grounded in reality and ensure you don’t lose it all (without a streak of horribly bad luck).
Pay off debt
First thing’s first. If you’ve got debt, throw everything you can at it. Depending on how much you stumble across, you may be able to be debt free completely. Living debt free is a great feeling. It helps keep your expenses low from month to month which gives you more flexibility to do what you want to do, like travel or start a business.
If you have a mortgage, depending on how much of a windfall you get, you may consider paying that off as well. You’ll lose out on some tax benefits, sure, but you won’t have the mortgage payment anymore. You may even opt for a more mobile life on the road. Not having a mortgage payment also greatly reduces the amount of money you need to live each month, making early retirement more feasible. Assuming your mortgage adds an additional $1500/month to your cost of living, you’d need an additional $450,000 or so to retire than somebody who is mortgage-free, all other things equal.
And of course things like cars (seriously, don’t get a car loan…if you can’t afford the car in cash, you can find something else that will do the job, or figure out transportation without a car) are a common culprit siphoning money from your budget each month as well. Paying off car loans will help curb some of that spending.
The nice thing about money is that you can use it to make more money, pretty easily. If you don’t have debts and have a healthy emergency fund, investing a windfall is a great idea. Most will advocate something like a low-cost index fund, or something which yields high dividends to help bring in additional revenue. You can look at other avenues as well, such as Peer 2 Peer lending, real estate, or others. The thing to note about investments is that most can lose value, so it’s best not to put all your eggs in one basket.
Still, putting your money into something that’ll grow and earn more money over time is a great way to safe-guard yourself against yourself and also get ahead at the same time.
If you don’t know what to do with the money, simply saving if for the time-being isn’t the end of the world. Doing so will protect you from making silly decisions like spending it on new fancy things that you probably don’t need anyway. You can take the time it’s sitting to decide what to do with it – what to invest in, for example. Keeping money in savings ensures it’s liquid so when you decide it’s time to invest it should be easily accessible. But, it’s not really working very hard for you, and might not even be keeping up with inflation. Regardless, just holding onto it for a while may give you the time you need to weigh all your options and make sure you don’t do something silly.
Bonus: Live a little
It goes against the rest of the things on the list, but honestly, enjoying a windfall is something everybody dreams of doing. Who hasn’t thought about what it’d be like to win the lottery?! After you’ve done any (or all) of the above, give yourself permission to enjoy a little bit of it – but make sure it’s only a little bit. Kristin and I have agreed on a set percentage (10% maximum) to be used however we want. If Kristin wants a new bag or I want a new video game, it’s got to all fit under that 10%. If it doesn’t, then it goes into the Save category for a later date.
Everything else above that 10% ‘fun money’ falls under the ‘Invest’ and ‘Save’ categories for us, making sure we set ourselves up for a good future.
Hypothetically you inherit 1 million dollars. What would you do with it? What about something a bit more meager, like $5,000?