How To Use an Unexpected Winfall
This is how to be sensible when receiving a large amount of unexpected money
You’ve suddenly come into a bit of unexpected money, whether it was a tax refund, bonus or inheritance, and you’re not sure what to do. You may be tempted to spend this money on a fun, new purchase. But consider these smart ways to use this money to create long-term benefits.
- Pay off your debts
- Create an emergency fund
- Contribute to your retirement plan
- Consider investing your windfall
- Get financial advice
Pay off your debts
In a CNBC and Acorns survey, respondents were asked what they would if they unexpectedly received a $5,000 bonus, and 34% of them said they would use the money to pay off debt. They have the right idea!
Consider using this money to pay off any short-term loans or credit card debt you have. You could use it to reduce your personal loan or mortgage.
Pay off higher interest debts like payday loans or credit cards first. If you have more than one credit card, pay off the one that charges the highest rate of interest or has the smallest debt first. Paying off debts means you'll pay less interest on the amount, saving money in the long run.
Create an emergency fund
If you don't already have one, start an emergency savings fund by opening a high interest savings account. If you can, aim to build up 1-3 months' worth of living expenses.
Compound interest will help your money grow. For example, $3,000 in an account earning 3% interest would grow to $3,485 in 5 years' time. If you deposit extra money into this account, your savings will grow even faster. In the future, if something unfortunate happens, you will feel more financially stable, rather than scrambling for cash.
Contribute to your retirement plan
Making extra contributions to your retirement plan can really boost the amount of money you'll have to live on later in life. The average length of retirement is 18 years, according to the U.S. Census Bureau. You can calculate if you have enough money to live comfortably in retirement with an online calculator.
Consider investing your windfall
Investing your windfall can help you grow your money and keep it safe. If you choose to invest, make sure you have a financial plan. Determine how much you’re going to invest, for how long, what your financial goals are, and if you understand your risk tolerance. Conduct your own research and don’t make purchases based solely on advice from others. Check that all securities are registered with the Securities and Exchange Commission using their EDGAR database.
If you would prefer to rely on professionals who are skilled in making investment decisions, you might hire an investment management firm. If you have existing accounts, they will help you transfer your money to them. They will invest based on your savings goals and time frame. They come up with an investment strategy to decide how to divide your portfolio among stocks, bonds and other investments.
Get financial advice
For large amounts of money, you might consider getting professional financial advice. A financial advisor can help you develop a plan to make the most of your money. Find someone who will help you make the best decisions and who is happy to explain details to you, so you understand what you’re getting into.