Life can sometimes feel like an endless chore with one problem after another lining up in quick succession. Your job as a human being is to work through them, one by one, knowing that no matter how many problems you fix, there’ll always be something new that goes wrong.
But every so often, you’re faced with a so-called “good problem:” how to propose to the love of your life, how to turn down one excellent job offer in favor of another, and how to manage a sudden windfall payout.
Windfall payouts can occur for any number of reasons. A wealthy relative might die, bequeathing you a large inheritance. A personal injury lawyer might collect a large sum of money from a negligent driver who hurt you. Or you could win the loittery. Although life is mainly drudgery, some people are fortunate enough to experience a fleeting moment of blind luck where their bank account suddenly goes from zero to hundreds of thousands of dollars.
The question, then, is what to do if you find yourself in a fortuitous financial circumstance like this. What should you do with the money once you’ve got it?
Pay Off All Your Bad Debts
The first thing to do is to sort out all the things that drain your wealth. A cash windfall is a chance to pay off all those high-interest loans and overdrafts that have been outstanding for months and put an end to a big chunk of your wealth going to pay creditors for lending you money. You can do without that.
Put Money Into An Emergency Fund
The next step is to provide yourself with some financial security. If you’ve got money left over after paying off your debts, it makes sense to put a chunk of your money in a savings account where you can quickly get access to it in the event of an emergency (like losing your job).
The great thing about emergency funds is that you can set them up so that they grow by themselves. Thanks to higher interest rates in the US, many banks now offer favorable returns on a range savings accounts which allow you to get a yield close to inflation without having to risk your money in the public stock or bond markets. Risk-free returns are always nice.
Plow Money Into Your IRA And Roth IRA
If your retirement account is looking a little skinny, then the next thing to do is put some money into to flesh out your retirement savings. IRAs and Roth IRAs are special kinds of accounts which allow you to change the time at which you pay tax. With a Roth IRA, you pay tax on the income you put into savings today (you can’t offset it against your income), but you pay no tax when you release those savings in the future. With an IRA, you don’t pay any tax on the income you put into savings today, but you must pay tax when you withdraw money in retirement.
Which type of account you choose depends on your financial circumstances. Those with longer time horizons might want to go with a Roth IRA to cut future tax bills. But it’s entirely up to you.
Fix Your Children’s College Fund
The price of going to college is ballooning. And while many commentators don’t think the current price surge can go on forever, it’s probably wise for parents to behave as if it will. If you get a windfall, then it makes sense to put some of it into a college fund. The more that you can put towards tuition fees, the less likely it is that your children will enter adult life with the millstone of student debt around their scrawny necks.
Pay Down Your Mortgage
The next step is to get a handle on your mortgage. Throughout your lifetime, you’ll likely pay tens of thousands of dollars in mortgage interest payments; dollars you’ll never see again. A windfall payment is an opportunity for you to cut the overall amount that you owe and, by extension, the total interest that you pay. More of the money that you pay on your mortgage goes into building equity - always a good thing.
Repair Your Home
When does the fun stuff start? Not just yet, sorry. Repairing your home is critical to ensuring that it retains its value and that you don’t fall into negative equity (where the amount you owe on your house is more than its sale price). Take some money from your windfall and use it to do all of those essential maintenance tasks you’ve been putting off because you didn’t have the cash.
Invest Most Of The Remainder In Investment-Grade Assets
Still no fun: not just yet. If you’re lucky enough to have money left over after all that expense, then you’ll want to invest a large chunk of the remainder in investable assets, like bonds, company shares, and REITs. These investments will hopefully grow over the long-term, providing you with vastly greater spending power in the future. You’ll be amazed at just how much money you can generate through the wonders of compound interest.
Give Yourself One Thing That You’ve Always Wanted
When you get a windfall, it’s nice to do something to celebrate. Life isn’t just about fulfilling your financial obligations: you also need to live. Most of us live our daily lives in the shadow of things that we’d love to spend our money on, whether it’s a holiday to an exotic destination, a new motorcycle or a Bruce Springsteen concert. It’s nice, just every once in a while, to actually go out and do these things. You can’t live twice.
So there you have it: how to manage a windfall. Getting a windfall payment isn’t an excuse to spend like there’s no tomorrow. It’s something that financially savvy people use to make themselves more economically secure. Now that you’ve read this post, how will you use yours? Will you be financially prudent? Or will you blow the whole lot in one fell swoop?
.jpg)
.jpg)
No comments:
Post a Comment