Even though tax season has come and gone for some, many people are still facing the prospect of getting a lump sum of money in the near future. Events such as graduations, birthdays, and unfortunately, deaths can lead to one getting their hands on a decent amount of money at one time.
Here are 5 great ways to put those windfalls to use…
Pay Off High Interest Debt
I think this one is at the top of my list because we, like many Americans, are dealing with a great deal of debt (just a hair under $90k at our last update).
If your debt carries interest, then it most likely makes sense to use any extra money to pay off debt. That is because you will probably not be able to earn more interest with your money than you are paying in debt. Also, for a number of reasons, having debt is akin to financial bondage, so even if your interest isn’t 30%, it can still weigh you down financially, emotionally, and psychologically.
Save For Retirement
This is one of the most overlooked areas in finance. Yes, we hear a lot about saving for retirement with various commercials from the big money managers, and as the “baby boomers” generation moves into retirement age, we are constantly hearing about how they failed to save for their retirement.
However, every time I talk to someone younger than 45, they have very little saved for retirement and it’s not even on their radar! So, with this in mind, take the extra money and add it to your IRA, or throw it in the bank and use it to offset your income as you increase your 401k contributions.
Pay Down Your Mortgage
I listed mortgage separately from other debt, because they are usually taken out at much lower interest rates than credit cards, so people don’t consider their mortgage in their list of debts (which is a mistake in my opinion). Anything you can do to pay less interest overall and be in debt for a shorter period of time is a good thing!
Take your windfall and pay down the principal of your mortgage, as long as you don’t have any other debt that is charging a higher interest rate.
Save Money For A Big Expense
Many people are not able to save a large amount of money for certain large expenses such as, a new car, vacation, new computer, or some other big expense that’s expected in the future.
Since this isn’t part of most financial plans, it makes sense to use this extra cash to save for one or more of these expenses.
Build Your Emergency Fund
I have written plenty of times about the importance of an emergency fund. For most people, and emergency fund is a must! If you are out of debt, stash away at least 9 months worth of living expenses in a high-yield savings account (My suggestion is that you open a new Checking or Savings account with Capital One 360 [Full Disclosure: this link contains my referral code]), and don’t touch it unless you have a true emergency.
The purpose behind this account is to prevent the need to using credit cards or taking out other loans when an unexpected, but necessary, expense comes up.