While it would be great if we could have enough money all the time, this isn’t possible for most of us. Usually, we have to exist on a regular budget, and sometimes if we’re lucky, we can expect a yearly bonus or our tax refund. Occasionally we may receive a windfall that is quite substantial due to a legal settlement or an inheritance.
When you receive a large amount of money that is unexpected, it can be a great opportunity to pay off debts, invest, or save for retirement. Often the monetary gift can come with the sad news of a loved one, and using the money wisely can be a great way to honor your relative or friend. There are so many options, though, that it can be difficult to figure out what is best. Here are a few ideas to get you started in case you are in this situation now or in the future.
1. Pay off debt
Paying off debt first isn’t right for everyone, but if you have high-interest debt such as credit card debt or a variable home mortgage loan, you should pay those debts immediately. You can also look into paying off car loans or students loans if you have no higher-interest debts. If the money you receive is a large amount but not enough to pay your debt off completely, then you may want to pay off your debt with the highest interest and then set aside the rest.
If you don’t have an emergency fund, you should also prioritize this — you should have roughly three to six months’ post-tax income saved, and that is a bare minimum. If someone bequeaths you a sizable financial gift that is much greater than your debt, you can still pay off a large portion of your debt (or all of it) and have money to use elsewhere.
2. Save for retirement
Depending on your age, you may already have a sizable retirement fund. Either way, most of us could use more money in our retirement, and using a monetary gift to increase your retirement can be a very good idea. You may even be able to retire early if the money you have recently obtained is a large amount. However, if you are still young and far from retirement age, don’t quit your job just yet.
Money often spends faster than we think it will, and it’s always good to have a backup plan. Plus, it is impossible to know what medical bills or other surprises might come in our future. You can help secure your future by keeping your job and also by contributing more to your 401(k), Roth IRA, or traditional IRA. If you are truly completely set for retirement, you can also put the money away for long-term savings. Even with adequate retirement savings, you never know when you might need extra money to pay for something unexpected.
3. Save for your children’s college costs
If you have kids now or plan to in the future, the cost of college has probably crossed your mind. If you are comfortable with your retirement savings and you don’t have any serious debt, a windfall can be a great way to start saving or add to your current college savings. A 529 plan is one option that can have many tax advantages, including federal and state tax benefits. You could also consider a custodial account or you could simply invest on your own. However, you have to be careful about how much and when you give your children money for college, because the money you save can affect their financial aid awards and loans.
4. Start your own business
If you are financially secure and you have no set place that your monetary gift needs to go, you might consider starting your own business or charity. This is only something you should consider if you are truly passionate about something, as owning a business or a charity requires a lot of planning and doesn’t always offer success. More than 600,000 businesses are started each year in the U.S., and 53 percent of American adults have thought seriously about starting their own business. Still, starting your own business is risky: According to Bloomberg, 80 percent of entrepreneurs fail within 18 months of starting a businesses.
If you like the idea of being your own boss but you don’t have any ready ideas, then you could invest in a franchise or even a friend’s project or business idea. Lastly, if you are passionate about a cause, you could consider starting a charity or heavily supporting one that is important to you and is already established.
5. Have some fun
As long as you are not drowning in debt (in which case, no fun for you!), this one applies to everyone regardless of whether you decide to pay off debts, save for retirement, or save for your kids’ college tuition. Even if you plan to put most of your money toward one or more of the first three points, you can probably afford to have some fun. If you are debt free, you’re saving for retirement, you have an emergency fund, and you have a solid plan for college costs, then perhaps you can even spend a good chunk of cash.
Consider purchasing something you have had your eye on for a while but seemed superfluous (jewelry, sports tickets, etc.); it is fun to buy things we wouldn’t normally buy when we are really able to. If you receive a hefty amount, you might choose a vacation or even a car. Just make sure that you have savings in all the right places first.
These are some ideas to get you started, but before you make any decisions, you might want to see a financial planner. Also, you don’t need to spend the money immediately. Many people receive large inheritances or settlements, but the money disappears quickly. You also might need to hire an attorney for legal issues, so you need to factor that in to the equation, as well. Also, a certified expert can help you to make a decision that will take into account all the taxes (like estate or gift taxes) that may affect you.