There are few things better than an unexpected fortune, but the sheer surprise can catch people off guard. It's all too tempting to cash in every last chip of a windfall, allocating the money before making a plan. Instead, consider the following tips on how you can spend and save the money. Here's how to have your cake and eat it, too.
Treat It Like Savings
A windfall is really just savings in disguise, so it helps to think of it like that. You don't have to deny yourself completely, but you may want to consider saving the vast majority of it. It also helps to understand how a windfall is taxed. The rates may vary, depending on how you came into the money, but it helps to take care of the taxes sooner rather than later. If you're not planning to pay the taxes on it immediately, put the money aside in a separate account so you aren't tempted.
Beef Up Your Emergency Fund
Emergency funds are there to stop the panic the next time you blow a tire or your furnace breaks in the middle of winter. They're exceptionally helpful for breaking the never-ending cycle of borrowing and repaying, and it can save you thousands of dollars in interest fees in the long run. Most of us have some money set aside, but not enough to meet 6-12 months of expenses (which is the standard amount suggested). Using your windfall to beef up your emergency fund is a great use of the money and safeguard against the unexpected.
Pare Down Debt
The more debt you pare down, the less you'll owe over time. While it can be difficult to pay for things from the past when you're thinking of all the things you want for the future, you may want to re-frame how you view the situation. The more credit cards you pay off, the more money you'll have to spend on the things you need (or want) every month. Plus, getting rid of debt can lift an immense burden from your shoulders — one you may not have even realized was there until it's gone.
Invest a Portion
One recommendation to consider is to remove temptation as much as possible. Putting the rest of the windfall into your checking account may seem like the next logical step, but that makes the money only one debit card swipe away from disappearing forever. If you choose to invest the money instead, you have a much better chance of gaining some type of appreciation on your windfall. Investment opportunities come in a number of different forms, and it may help to talk to a financial advisor to help you figure out where the money may do the most good for your future finances.
The opinions expressed are for general information; you should consult your outside professionals and advisors for information regarding your individual situation.