Financial windfalls: Big tax refund . Inheritance. (I’m sorry for your loss.) Winning the lottery. (Congratulations! Although playing in the first place should be done in moderation, if at all.)
So, you’ve suddenly found yourself in a position of having a ton of money (to you, anyway) and don’t know what to do with it. Your first instincts? Trip to Vegas, baby! Three weeks in Europe, visiting all of the amazing sites! New fancy car! (Sorry, I don’t know enough about cars to be more specific.)
But let’s step down from the clouds for a moment, and take a deeper look into the best way to handle such windfalls of money.
Don’t Blow it All at Once! (But Maybe a Little…)
Honestly, this is what I would like to do. I know, I know, it’s not the “My Dollar Plan” way of living. But it’s definitely a secret fantasy of mine. The European adventure above would fit me quite well. Throw South America, Africa, Asia and Australia in there for good measure, too.
My actual recommendation for a first step? Hold on to the money. In the bank. Don’t touch it. Keep it there for a few months to allow your brain to calm down and start thinking in the long term.
I have one exception to this; take a small amount, maybe 5-10%, and blow it away in those first few days of frenzied fun, just to get some of the excitement out of your head.
After a Few Months
Alright, now that you’re ready to think long term, take a look at your current financial situation. This is the most important step. All of these items should be carefully looked over by you, or your financial advisor (a good investment when you have a ton of money you don’t know what to do with):
- Emergency Funds
There are other considerations, but I think these are the most important first steps to look into.
Make Your Decisions
As always, this part is going to be different for everybody, but I’ve got my two cents to throw in, given my situation.
This is why I suggested the financial advisor. A Tax Accountant and/or Lawyer could be just as essential as well, especially depending on the amount of your windfall.
Getting a few thousand dollars may not affect your taxes  that much, but it’s definitely a good idea to find out exactly how much you may have to pay. You can use the tax calculator  to estimate the impact. Although paying down debt and adding more to your savings would be first things to consider, you wouldn’t want Uncle Sam to come after you next year and take away a large chunk of that savings, or force you into debt again.
Got debt? Pay it down . Depending on the size of your windfall, you could pay down your debt, up to paying off all of your debt. In any event, I would suggest going in the following order: Consumer debt (credit cards), car payments, mortgage, and student loans. Why that order? Generally speaking, this order is the one with the highest to lowest interest rates. If you can pay it all off, you’ll have a wonderful feeling ! I was there once. (Sigh)
Even if you can’t pay off all of your debt, I would still recommend putting some of that money into various savings vehicles. If you don’t have an adequate emergency fund , fill that baby up first!
Next, make sure you are contributing the maximum to your 401k  account that your employer will match. Any extra you want to add to retirement, put into a Roth or Traditional IRA, or other retirement account, depending on what your financial advisor(s) recommend.
If you’re saving for your child(ren)’s higher education, definitely open or add to your 529 plan . Be sure not to save more than you think it will cost, as pulling out 529 funds without an education purpose has a high tax fee.
Once you’ve got your bases covered for taxes, savings and debt, have a little fun! Having thought a few months about what to do with the money, hopefully you have a good idea of what is most important to you in this department. It’s travel for me!
If your windfall was not too large, you may have the desire to skip the previous steps and come straight to the fun. And that’s OK. It is your money, after all. If you’re doing well financially, this is certainly a fine option. I definitely recommend getting rid of as much consumer debt as you can before this option. But, that’s my personal opinion.
When I say “Stay Active,” I’m referring to both fiscal activity and physical activity. Even if you’ve gained enough money to pay off all of your debt, save all you need to pay for a grand retirement, with plenty of money left to buy gifts for family and friends, you will always want to stay on top of your finances, even if you don’t have to do it as often. Always make sure your plan is still working for you.
Finally, stay physically active. Bad health and high costs can wipe away the largest of windfalls. Not only will staying active keep your health costs down, it will allow you to live longer, and have more time to enjoy the things you love best!