Windfalls may seem few and far between but when they happen, many people make rash decisions and spend unwisely. Just think, now you can score those fancy sneakers, or flashy car you’ve had your eye on. Right? Sure, everyone loves to have nice things, but if you are living paycheck-to-paycheck, the last thing you should do is waste your cash on impulsive purchases. This doesn’t mean you should never treat yourself, but the timing could very well determine your future wealth. Not everyone is thinking about what will happen years from now, but life goes by fast, and tons of retirees admit they wish they’d managed their money better. Here are a few things you can do to ensure you don’t make serious financial mistakes:
Take Your Time - Jumping into a big purchase could eat up your entire pot of gold, or worse, put you further into debt than when you started; especially if it requires a downpayment on the new item that gets paid off later. Give yourself a few days to cool down from the excitement and then weigh your options with a pros and cons list…or a financial advisor if you’ve come into some serious money.
Consider the Tax Implications - Find out whether or not taxes have already been taken out of your lump sum, or if you are going to owe. Investment options have different tax penalties so take your time and research what works best. And keep in mind that some debt is tax-deductible which can save you when it’s time to file.
Emergency Fund: Do you have one? If not, now is the best time to start one. This is the fund you will turn to when you find yourself in an emergency situation that calls for quick cash; some of these could be an accident, sudden illness, layoff, or unexpected fine. So be sure and set up an emergency fund before you spend or invest.
Pay off Debts: You may want to use some of your newfound riches to pay off credit cards or car loans, but be careful not to spend it all in one place. And take a look at your current debt-to-income ratio (DTI) to see if it is over 25% to 33% of your pretax income. If this is the case, it may be wise to make some payments on the debt that has the highest interest, or pay off a small debt completely. Otherwise, move onto the next step.
Invest: This is the smartest option you can select when deciding what to do with your unexpected funds. While it requires you to think longterm, there is a possibility that this type of money management will make you even wealthier than you could imagine. Investment income can free up cash outside of your paycheck so you can eventually get your hands on things like those expensive shoes and other exciting purchases without worry. And it could help you to someday retire.
Investments pay you back in dividends, interest or appreciation, depending on where you place the money. While some investments like stocks, bonds, exchange traded funds (ETFs) , mutual funds and certificate of deposit (CDs) come with risk, some are safer than others. The best thing to do is to connect with an investment advisor who can help you choose what’s right for you.
No matter what you decide, this is a time to celebrate and accept it as a second chance of getting ahead in life. Especially if you are stuck in a cycle of financial struggle.