What Should I Do with a Sudden Windfall?
When you receive a sudden windfall of money from an inheritance, a settlement or just as gift you may be wondering about the best plan of action for your money. This extra money is an opportunity for you to improve your financial situation. Many people often fritter away the money because they do not have a specific plan for it.
Determine Your Tax Implications
First, you should consider the tax implications of the money that you receive. It depends on where the money comes from as to whether or not it is taxable. You should talk to your tax accountant or a professional to determine whether or not the money is considered exempt from taxes. Most money is not, and so you should set aside enough money to cover the taxes or pay the taxes now.
Set Aside a Small Portion for Fun
You should allow yourself a small percent to use for your enjoyment or entertainment. Generally, this should be no more than ten percent of the money. Use this money wisely. If you shop the sales and wait for prices to drop you will be able to get more for the amount of money that you spend. You may receive peer pressure to spend all of your money on fun instead of using it wisely. It is important to have fun but you should track your spending and stop as soon as you reach the amount that you set aside.
The majority of the money should be used to cover other expenses.
Set Up a Financial Plan
The rest of the money should be applied to your long-term financial plan. This plan should be based on your goals and should go with your investment strategy. It is important to have long-term financial goals and to plan for things like retirement. Before you make any additional decisions with your money, you need to create a financial plan if you do not already have one. If you already have one, you may want to adjust your goals. You may be able to speed up the process and reach them much more quickly.
Pay Off Your Debt
If you still have debt payments you can use this money to pay off your debt. However, if you are not committed to staying out of debt—absolutely one hundred percent committed—then you should invest the majority of the money. Otherwise, you will simply run your debt back up in a few years and you will have nothing to show for the windfall. If you already have a firm financial plan the first step should be to get out of debt. Once you have paid off your credit cards, you may want to close the accounts.
Create an Emergency Fund
After you have gotten out of debt you should create an emergency fund of about six months of your income. This money should be put in a high yield savings account. This money should only be accessed for true emergencies such as a job loss or medical emergency. When you dip into your emergency fund, you need to replenish it with your monthly income. For all other expenses, you should plan and save for them.
Invest Your Money
After you have done this you should invest the rest of the money. The safest and easiest way to invest the money is to choose good quality mutual funds with a high annual yield. You should talk to a financial adviser about which funds to choose. You may find a financial adviser through your bank or through referrals from a friend. Mutual funds spread the risk over several stocks, but you should also diversify your investments over a few different mutual funds, and mutual fund types in order to minimize your risk.
Consider Buying a Home
Another option to consider is purchasing a home. If you have not already purchased a home this money may make an excellent down payment for the home or purchase it outright. You may choose to invest a large portion of the money and use some of it on a down payment. If you do purchase the home outright you should invest the amount that would be your house payment each month so that you can really begin building wealth. Additionally owning a home outright can make the money you earn each paycheck do more and make it easier to add to your investments.
Take Care of Your Financial Responsibilities
If you find yourself responsible for another person in conjunction with the windfall, for example, your parents pass away and you become the guardian of your siblings, you need to plan with those responsibilities in mind. It is important to make sure their needs are met as well as your own through a trust or something similar. it may also change your long-term career plans and education plans. You may want to consult a lawyer and set up a trust for the money that will help cover education expenses for your charges.
A trust can help protect the money, especially if they are not making the best choices once they are eighteen years old.