You and I would both be lying if we said we never wished for a huge windfall of money to magically appear in our bank account.
Just imagine if you woke up to find $34,000 worth of money deposited into your checking account!
After cleaning up a few pee stains and taking your significant other out on the town, you would inevitably have to figure out the answer to this question:
What should I do with a cash windfall?
First, let’s talk about what not to do with a windfall of money!
Don’t do this with a windfall:
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There is a high probability you have heard of people winning the lottery, only to squander all their winnings away in a matter of years.
While there is something to be said when it comes to valuing what you worked hard for, sometimes a cash windfall can be devastating.
For example, William Post III won $16 Million in 1988, enough to last him 160 years if he lived off $100,000 per year. However, by 1990, he was in debt and in 2006 he was living on food stamps.
Or take the case of Amanda Clayton who won the lottery, but was then convicted of using state welfare money (After winning over one million dollars) and was found dead at age 25.
While these are some extreme examples of people who didn’t know what to do with their windfall of money, they do teach a lesson:
1. First, pay off bad debt!
Perhaps you accrue some consumer debt while you were in college or trying to survive the working world in your early 20’s.
Regardless of how you got into debt, a cash windfall is a great time to pay off your bad debt. As Logan Alec from Money Done Right says in this post on financial goals,
“One goal you should have is to pay off or refinance all your high-interest debt by the time you’re 30 years old.
-LOGAN ALEC, MONEY DONE RIGHT
Nevermind refinancing, you just got a boatload of cash to use instead!
Bad debt is typically debt that has high-interest rates – like credit card debt. With your cash windfall you can use one of two approaches to pay off your debt:
- Line up your debt from the HIGHEST interest rate to the lowest.
- Use your cash windfall to pay the principal balance of the debt with the highest interest.
- Work your way down the excel sheet paying off the highest interest debt first.
- Line up your debt from the LOWEST balance to the highest balance owed.
- Use your cash windfall of money to pay the lowest principal balance owed.
- Wash, rinse, repeat!
2. Create a FAT emergency fund!
If you don’t have any high-interest debt, aka bad debt, the next logical sequence when approaching how to use a cash windfall is to start or enhance your emergency fund!
Consider starting or adding to your emergency fund with your cash windfall, here is how:
- Open up a high yield savings account separate from your checking account (For example Ally.com).
- Figure out what your monthly fixed expenses are
- Be sure to have at least three months worth of an emergency fund in your savings account
- If you already have three months, increase your emergency fund to six months with your windfall!
Life will happen, so it is best to be prepared financially when possible!
When my dog at cocoa powder in the spring of 2019 we received a $4,300 veterinary bill. Luckily, we had an emergency fund to cover the surprising expense!
3. Pay off other debt like cars or student loans.
Depending on your personal situation, there is a high likelihood you have some debt that may not be viewed as bad debt per se, but it is still debt!
The thing sitting in your driveway with four tires might be a necessary apparatus to get you from place to place, but it could very easily consume 10-20% of your net income each month.
Consider paying off your car with your windfall of money so you can increase your monthly cash flow! You can use the freed-up cash to save, invest, or travel!
Pay Off Student Loans:
If you happen to be a millennial or younger, chances are you might have some student loans lingering in the background.
Go ahead and use your cash windfall to crush as much as you can! Once you have an emergency fund in place, use the money to just get rid of your student loans.
If you ever read “Smart Money Moves to Make,” #6 states to pay off your student loan debt.
Even if your student loan debt is manageable – just get rid of it – you will feel mentally free and be on the up and up so you can save for the future!
4. Use your windfall to invest!
- Pay off bad deb – Check.
- Create an emergency fund – Check, Check.
- Pay off cars and student loans – Check, Check & Check.
If you’re the person who has already done numbers one, two and three then hats off to you. You’re in a great position to really leverage your cash windfall for some long term gains!
You can now save some money for retirement. Consider doing the following:
Add to your 401K or 403B
Hopefully, you’re already contributing to your 401K, but with your newly acquired cash, go ahead and make a one-time contribution!
A cash windfall invested early can have some huge returns down the road!
Contribute to your ROTH IRA
If by chance you’re behind with your retirement contributions, there is no better time to contribute to your Roth IRA retirement account. Throw as much as you can or at the very least a % of your windfall towards retirement!
Invest in Stock Index Funds
Perhaps you have your investments when it comes to retirement streamlined if that is the case and you want to invest – simply open a Vanguard account and invest in ETF’s.
Typically considered “Less risky” an ETF is a great way to invest your money and see big returns over the long haul!
Consult a Financial Expert:
If you happen to have a cash windfall that is up there ($50,000+) and you’re debt-free and well invested, this might be a good time to consult a financial expert.
Learn from some of these beginner investing mistakes and don’t play around when it comes to investing! Depending on the amount of money you inherit/get you can create passive income with investing properly!
5. Buy a home.
If you don’t already own a home, receiving a cash windfall might be the down payment you have needed to finally take the leap to purchase your first home.
Conventional wisdom used to say wait until you have 20% saved to buy a home, however, with soaring real estate prices, it is actually sometimes advantageous to buy with a lower down payment.
6. Add value to your home.
A cash windfall is a perfect time to go ahead and gut the kitchen and update it with all the modern gray-scale colors that are in!
Replacing your roof, swapping out the windows, getting a new front door and remodeling a few bathrooms are always great ways to add value to your home… especially if you plan on selling in 2-5 years.
Use your cash windfall to pay cash for some home upgrades!
Now is your time to sponsor that youth sports team you have always wanted to!
All jokes aside, with your cash windfall, consider giving back in some monetary form whether it is a local school, church, or family in need!
On the off chance you’re not sure where to donate a portion of your money, be sure to always make sure to donate in non-profits that do good things with the money (And don’t have tons of administrative costs).
8. Start a college fund.
If you have kids, there is no better time to start that college fund with a 529 savings plan for your kids than when you have a surplus of money. Similar to a 401K, this is a tax-deferred option for saving for college tuition!
9. Take a vacation!
Depending on how much money you come across, the best time to take a vacation is when it’s free – well at least it’s free as far as you’re concerned.
While going crazy and traveling to Bora Bora might be a bit much, getting away for a few days isn’t a bad idea, especially when you get a lump sum of cash to do so!