Most of us aren’t so lucky that money frequently falls out of the sky. When it does, whether in the form of an annual bonus, income tax refund, insurance settlement, income from the sale of something, or as an inheritance, deciding what to do with it can be a bit overwhelming.
What Are You Doing Now?
Look at your financial situation before you received your windfall. What were your priorities and goals? Were you paying off debt, saving for an emergency fund, or saving up for a down payment?
What NOT To Do With A Windfall
Woohoo! Free money! Vegas baby! Just because money wasn’t expected doesn’t mean you can be irresponsible with it. And just because you’re “doing fine” without it doesn’t make it smart to blow it all on toys. Every dollar that comes into your home is a dollar you’ve earned in one way or another, and each of those dollars deserves to play a part in your life.
Order Your Priorities
If your #1 priority is to get out of debt, then this is easy. Whether you’re paying off high interest loans first or using the snowball method, the easiest thing to do is put all your found money towards your debt. This will greatly accelerate the amount of time it’ll take you to pay off the rest, and you should be pretty happy about that.
If you’re trying to save up a small emergency fund AND pay off debt, you can do a bit of both. Put $500 or $1,000 of your windfall towards your emergency fund and the rest towards debt.
If the amount you received is very large compared to the amount you owe, you have a bit more flexibility. Maybe top up your emergency fund, pay off your debts, put some aside for a down payment, give some to charity, and go enjoy some of it.
Enjoy It A Little Bit
It’s ok to enjoy spending a portion of the money you received. If this is an annual bonus, feel free to go out for a nice dinner date before dividing the rest up. If it’s more, consider a reasonable vacation or home renovation.
You don’t want to end up resenting this money or your choices, but you DO want to be happy and confident that your decisions with regards to it are accelerating yours and your family’s goals.
Don’t Forget About Taxes
Always double-check how you will be taxed on this money. There’s no sense in using it all to pay off your credit card debt only to find an enormous tax bill waiting for you at the end of the year. That’s why it’s always best to take a deep breath and look at your options before dumping all this money somewhere.