I would be lying if I said I had never wished for a huge windfall of money to magically appear at my door one day.
Just imagine if you woke up to find $34,000 worth of money deposited into your checking account!
After cleaning up a few pee stains and taking your significant other out on the town, you would inevitably have to figure out the answer to this question:
What should I do with a financial windfall?
Not to leave you hanging, we will get to what to do with your financial windfall, but first, let's talk about what not to do with a windfall of money!
- Learn what to do with a financial windfall, aka a “Cash windfall“
- See which route is best for you if you “fall” into money!
- Know what not to do with a financial windfall!
Don't do this with your cash windfall…
There is a high probability you have heard of people winning the lottery, only to squander all their winnings away in a matter of years.
While there is something to be said when it comes to valuing what you worked hard for, sometimes a cash windfall can be devastating.
For example, William Post III won $16 Million in 1988, enough to last him 160 years if he lived off $100,000 per year. However, by 1990, he was in debt and in 2006 he was living on food stamps.
Or take the case of Amanda Clayton who won the lottery, but was then convicted of using state welfare money (After winning over one million dollars) and was found dead at age 25.
While these are some extreme examples of people who didn't know what to do with their windfall of money, they do teach a lesson:
You should have a plan when you get your hands on a large sum of money!
How to use a cash windfall the right way!
You might be shaking your head while silently mumbling, “I don't think I will ever get a windfall of money,” but chances are you just might.
Whether you play the lottery, have a relative pass, or in my personal case – sell a piece of real estate that jumped in value – it is best to at least have a plan if you ever come across a large amount of money in one lump sum!
In fact, you might someone who actually gets a cash windfall every year, AKA your annual tax refund.
Just getting an extra $2,000-$5,000 from your tax refund can be considered a windfall and if you're strategic, you can really make some financial strides!
Here are some tips to help you if you ever come across a cash windfall!
Related Content: What if you got $100,000?
1. First, pay off bad debt!
Perhaps you accrue some consumer debt while you were in college or trying to survive the working world in your early 20's.
Regardless of how you got into debt, a cash windfall is a great time to pay off your bad debt. As Logan Alec from Money Done Right says in this post on financial goals,
“One goal you should have is to pay off or refinance all your high-interest debt by the time you’re 30 years old.
-Logan Alec, Money Done Right
Nevermind refinancing, you just got a boatload of cash to use instead!
Bad debt is typically debt that has high-interest rates – like credit card debt. With your cash windfall you can use one of two approaches to pay off your debt:
Debt Avalanche:
- Line up your debt from the HIGHEST interest rate to the lowest.
- Use your cash windfall to pay the principal balance of the debt with the highest interest.
- Work your way down the excel sheet paying off the highest interest debt first.
Debt Snowball:
- Line up your debt from the LOWEST balance to the highest balance owed.
- Use your cash windfall of money to pay the lowest principal balance owed.
- Wash, rinse, repeat!
2. Create a FAT emergency fund!
If you don't have any high-interest debt, aka bad debt, the next logical sequence when approaching how to use a cash windfall is to start or enhance your emergency fund! In fact, increasing your personal cash flow to fund your emegency savings is a must!
Consider starting or adding to your emergency fund with your cash windfall, here is how:
- Open up a high yield savings account separate from your checking account (For example Ally.com).
- Figure out what your monthly fixed expenses are
- Be sure to have at least three months worth of an emergency fund in your savings account
- If you already have three months, increase your emergency fund to six months with your windfall!
Life will happen, so it is best to be prepared financially when possible!
When my dog at cocoa powder in the spring of 2019 we received a $4,300 veterinary bill. Luckily, we had an emergency fund to cover the surprising expense!
Either way, if in the event your dog eats chocolate, or there is a cash windfall from a life settlement, you could always choose to…
3. Pay off other debt like cars or student loans.
Depending on your personal situation, there is a high likelihood you have some debt that may not be viewed as bad debt per se, but it is still debt!
The thing sitting in your driveway with four tires might be a necessary apparatus to get you from place to place, but it could very easily consume 10-20% of your net income each month.
Consider paying off your car with your windfall of money so you can increase your monthly cash flow! You can use the freed-up cash to save, invest, or travel!
Pay Off Student Loans:
If you happen to be a millennial or younger, chances are you might have some student loans lingering in the background.
Go ahead and use your cash windfall to crush as much as you can! Once you have an emergency fund in place, use the money to just get rid of your student loans.
If you ever read “Smart Money Moves to Make,” #6 states to pay off your student loan debt.
Even if your student loan debt is manageable – just get rid of it – you will feel mentally free and be on the up and up so you can save for the future!
Related: Pay Off Debt Guide 2019
4. Use your windfall to invest!
- Pay off bad deb – Check.
- Create an emergency fund – Check, Check.
- Pay off cars and student loans – Check, Check & Check.
If you're the person who has already done numbers one, two and three then hats off to you. You're in a great position to really leverage your cash windfall for some long term gains!
You can now save some money for retirement. Consider doing the following:
Add to your 401K or 403B
Hopefully, you're already contributing to your 401K, but with your newly acquired cash, go ahead and make a one-time contribution!
A cash windfall invested early can have some huge returns down the road!
Contribute to your ROTH IRA
If by chance you're behind with your retirement contributions, there is no better time to contribute to your Roth IRA retirement account. Throw as much as you can or at the very least a % of your windfall towards retirement!
Invest in Stock Index Funds
Perhaps you have your investments when it comes to retirement streamlined if that is the case and you want to invest – simply open a Vanguard account and invest in ETF's.
Typically considered “Less risky” an ETF is a great way to invest your money and see big returns over the long haul!
Consult a Financial Expert:
If you happen to have a cash windfall that is up there ($50,000+) and you're debt-free and well invested, this might be a good time to consult a financial expert.
Learn from some of these beginner investing mistakes and don't play around when it comes to investing! Depending on the amount of money you inherit/get you can create passive income with investing properly!
5. Buy a home.
If you don't already own a home, receiving a cash windfall might be the down payment you have needed to finally take the leap to purchase your first home.
Conventional wisdom used to say wait until you have 20% saved to buy a home, however, with soaring real estate prices, it is actually sometimes advantageous to buy with a lower down payment.
Note: If you already own go ahead and use a portion of your windfall to make a huge payment to accelerate your mortgage!
6. Add value to your home.
A cash windfall is a perfect time to go ahead and gut the kitchen and update it with all the modern gray-scale colors that are in!
Replacing your roof, swapping out the windows, getting a new front door and remodeling a few bathrooms are always great ways to add value to your home… especially if you plan on selling in 2-5 years.
Use your cash windfall to pay cash for some home upgrades!
7. Donate
Now is your time to sponsor that youth sports team you have always wanted to!
All jokes aside, with your cash windfall, consider giving back in some monetary form whether it is a local school, church, or family in need!
On the off chance you're not sure where to donate a portion of your money, be sure to always make sure to donate in non-profits that do good things with the money (And don't have tons of administrative costs).
8. Start a college fund.
If you have kids, there is no better time to start that college fund with a 529 savings plan for your kids than when you have a surplus of money. Similar to a 401K, this is a tax-deferred option for saving for college tuition!
9. Take a vacation!
Depending on how much money you come across, the best time to take a vacation is when it's free – well at least it's free as far as you're concerned.
While going crazy and traveling to Bora Bora might be a bit much, getting away for a few days isn't a bad idea, especially when you get a lump sum of cash to do so!
Final Thoughts on Using a Cash Windfall Wisely:
Not long ago (October 2018) my wife and I had $173,000 worth of student loan debt left to pay from our combined original amount of $300,000+!
- $75,000 Student Loan 1
- $72,000 Student Loan 2
- $26,000 HELOC (Used to pay student loans)
We received a $34,000 cash windfall from the net profits of a real estate sale that allowed us to pay off $34,000 worth of student loans in a single day.
On the cusp of going down the path of parenthood, we thought about possibly saving a portion of the money for a future home or using it to increase our existing emergency fund.
However, ultimately we knew pretending as if the money never hit our accounts would be our best option in the long run (Always think long term financially).
So on October 22nd, 2018 we paid off a $24,000 worth of student loan debt (see photo below) and another $10,000 towards our HELOC.
At the end of the day, the choice is yours as to what you decide to do with your cash windfall! No matter how you got the cash, it is yours to do as you please…
Just be sure to make the smart money move and avoid the Amanda and William type decisions!
Q: What would you do with a $34,000 cash windfall? Comment below.
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $200,000 in student loans with his wife in less than four years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post and more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their chocolate lab named Morgan, working out, helping others with their debt and recommend using Personal Capital to track your finances.