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What should you do with a financial windfall?

2010 October 18

Sometimes we get lucky and some extra money comes our way.  Maybe it’s a just a bonus at work or a gift from a family member.  Wherever it comes from, it’s a good idea to stop and think about the best way to use this money.  The biggest thing to remember is that it’s a WINDFALL - a one-time thing - so don’t spend it frivolously or use it to make an upgrade on your standard of living.  Unfortunately, this is what lottery winners do and also why so many of them are broke.

Flickr - quinn.anya

My windfall came with the sad news of my grandmother’s death.  It wasn’t a ton of money - like those lottery winners - just a few thousand dollars.  However, it was enough to be tempted, given my shopoholic past.  I had to make sure that this money was spent in a way that didn’t betray my financial goals.  Here are a few guidelines to follow:

Pay off Debt

If you are paying high interest rates on your credit cards, then you should definitely use the money to pay them down.  I used a portion of my windfall to pay off my evil American Express card.  Woo hoo!

You should also think about paying off any other personal debt - car loans or other personal loans.  However, you may want to hold off on putting the money toward your mortgage, especially if you have a low interest rate.

Flickr - alancleaver_2000

Fund that emergency fund

The second thing you should do with the money is to fund your emergency fund - 3 months income is ideal.  This step is crucial so that you don’t end up back in credit card hell should something happen such as major car or home repairs or medical bills.

Save for retirement

If you still have some of your windfall left, you next need to fully fund your retirement accounts.  This means maxing out your 401k contributions and making your maximum annual contribution to your Roth IRA, which this year is $5000.

Wait, what about my kids?

A lot of people want to use the money to start an education fund for you kids.  Why this may sound like a noble thing to do, you have to make sure YOUR retirement (not to mention your present situation) is secure first.  Your kids will have loans and grants available for them to go to school.  You won’t have this for your retirement.  Also, whatever money they have as assets can cause them to not qualify for additional loans since their assets are included in their loan applications.

These are just a few suggestions to help you make the best use out of your windfall.

Check out this article for more tips.

What would you do with your windfall?

What other tips can you share?

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