Some Smart Ways to Use an Unexpected Windfall

by Mike on April 23, 2012

Windfall

As a child, you may have played the game of LIFE and enjoyed those moments you get an unexpected windfall. The same can happen in real life. A few years ago, many Americans got an unexpected windfall when President Bush offered a tax rebate to a majority of U.S. citizens. Some people get an unexpected windfall when they get a larger tax return than they were expecting or a relative dies and leaves them an inheritance.

If you get an unexpected windfall, it is important to have a plan to decide what to do with the money before you spend any of it. In addition, if it is a large windfall, you may want to put the money in the bank and not spend any of it until you have had a few weeks (or months) to decide the best way to utilize the money.

Here are a few ideas how to use an unexpected windfall:

  1. Pay down debt. Many Americans have “bad” debt such as credit card debt. If that is true for you, take some or all of the money and pay down your debt. Doing so will increase your monthly cash flow and reduce the amount of money you are losing to interest payments.
  2. Bulk up your emergency fund. Some experts now recommend that families have up to 8 months in an emergency fund. An unexpected windfall can help you reach this goal.
  3. Pay monthly expenses for the entire year. Many organizations you pay monthly such as your child’s school (if he is in private school), afterschool daycare, sports organizations and others will give you a discount if you can pay the entire year upfront. For example, my child takes dance class, and I received a 10% discount by paying for the entire year upfront in September. Not only will paying for the entire year perhaps give you a discount, but it again frees up monthly cash flow.
  4. Invest in yourself. If you have not completed your college degree or you are looking to get your Master’s, an unexpected windfall may help you do that. Investing in yourself can help extend the power of your windfall because you will probably make more money through the years thanks to improving yourself now.
  5. Pay down your house. The last few years have reminded many Americans that the safest financial move is to have your house paid in full. If you unexpectedly lose your job, you don’t have to worry about also losing your home due to foreclosure. If the market reduces the value of your home, you are somewhat insulated from that because the home is already paid for.
  6. Put money in your retirement fund. If your retirement is less than it should be for your age, consider using the windfall to bulk up your retirement accounts.
  7. Start a business. Whether you decide to incorporate in California or start a small LLc in Washington owning your own business is not only personally rewarding it also can be a profitable way to ease into retirement.

Of course, if you receive a large windfall, it is always best to speak with a professional to make a sound plan for how to use the money. If it is a smaller windfall, your natural instinct may be to first think of ways you will spend it. Instead, think of ways you can invest in yourself and your future and make your finances more secure.

Photo courtesy of Tax Credits via Flickr.

{ 2 comments… read them below or add one }

1 Julie @ Freedom 48 April 30, 2012 at 9:13 pm

It’s so important to have a plan in place before hand. Many years ago (before we became savers/investers/early retirement planners), we inherited some money when my husband’s grandmother passed away. Immediately we felt we should treat ourselves, so we purchased a $3,000 treadmill… and then saved the rest.

To this day… nearly a decade later… I still regret the treadmill purchase! Yes, we use it, but I see $800 treadmills advertised all the time. If I did it again I’d purchase one used from Kijiji!

I wish we had of had a plan in place before we received the inheritance.

2 John April 25, 2012 at 5:11 pm

These are probably all things I would do. I would order them using Dave Ramsey’s baby steps and make sure that I’m doing everything in the correct and most beneficial way.

If I’m ever given a lottery ticket (I don’t pay the lotto) and I win, I’ll take some of this advice! 😀

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