An inheritance, a bonus, an insurance payout. All of these situations could bring you an unexpected financial windfall. While your first instinct may be to celebrate and spend, there are actually several important issues you should think about first.
Making some smart moves can put you in a better financial situation for the long run. Ask yourself these questions:
Do I have high interest debt?
High interest debt, like credit card balances, can cost you hundreds or even thousands of dollars a year in interest and affect your creditworthiness and ability to borrow. Consider using your windfall to pay your debt down, starting with the highest interest debt.
Do I have enough money in my emergency savings?
Financial professionals recommend having three to six months' salary in an emergency savings account to cover important expenses like rent or mortgage payments, food, transportation costs, and insurance in case you lose your job or are off work due to an illness or injury. If you have less savings than you need (or no savings), now's the time to beef up your emergency fund.
Am I saving enough for retirement?
Think about putting some of your windfall into a traditional or Roth IRA or other retirement savings account. If you have a 401(k) plan through your employer, increase your contribution to that account.
Have I saved for my kids' education?
If you have children, you may want to put away money to pay for their education. Explore all your options, including tax-favored 529 accounts, which feature tax-free withdrawals if the money is used for qualified expenses, including tuition, room and board, and books. You could also use the money for your own education expenses if you're thinking about going back to school or taking training classes to update your skills.
Am I planning to buy a home?
If you're in the market for a new home, you could set aside a portion of your windfall to use as the down payment. Many mortgage lenders offer better interest rates for down payments of 20 percent or more of the purchase price. In addition, a bigger down payment can lower your monthly mortgage payments and could mean that you won't have to have mortgage insurance.
Do I want to invest some of my money?
While putting some of your windfall into stock, mutual funds, real estate or other investments does involve risk, it can also be an important part of your long-term financial strategy. With this risk comes a higher rate of return than on a savings account or certificate of deposit, but you should talk with an independent financial advisor to figure out how much risk you are comfortable with and what investment options fit your goals.
It can be helpful to get the advice of a financial planner when deciding how to handle your windfall. Ask friends and family if there's someone who they would recommend or look for an advisor who is licensed and has earned the certified financial planner (CFP) designation from the Certified Financial Planner Board of Standards.
Financial experts also have one recommendation that's a bit more fun. Set aside 2 to 5 percent of your windfall to do something nice for yourself and your family like a special trip.