What would you do if your lottery ticket showed the winning numbers? Or if a long-lost relative bequeathed you their entire estate?
While some of you may have no idea how you would react, we’re willing to bet many of you have dreamed about how you would spend your newfound fortune. It’s hard not to imagine how much your life would be affected with some extra money sitting in your bank account, especially if you’ve ever had to worry about paying for an unexpected or an emergency expense.
Although an influx of cash after something like winning the lottery could change your life for the better, the reality of a financial windfall may be very different from what you may have imagined.
To make sure you’re ready to handle it, check in with this guide. We’ll go over what a financial windfall is before sharing our advice on managing your financial surprise.
Financial Surprises Aren’t Always a Cause for Alarm
When it comes to your finances, a surprise can sometimes be a bad thing when it arrives in the form of a bill or repair you’re expected to pay.
Finding out you owe money is never a good thing, but it’s especially disheartening when money’s tight.
With your resources stretched thin, you may rely on a payday loan in an emergency. When borrowed from an installment loans direct lender, this short term loan acts as a convenient stopgap when you’re short on savings. It may help you cover exceptional costs like a funeral or medical expenses, as well as unexpected auto or household repairs.
What is a Financial Windfall?
A financial windfall is a kind of a pleasant surprise that may brighten your day. It’s not an added expense you’ll have to pay, but it’s extra money which you get to save or spend as you like.
This money may come in the form of:
- Legal settlements
- Lottery winnings
- Special dividends
- Tax refunds
Financial windfalls may come in all shapes and sizes — from modest cash bonuses at the year’s end to huge Powerball payouts.
A lot can fall under this definition. It can be unpredictable and it may not be something you expect. Sometimes, you may never know how much money is coming until it arrives.
For this reason, things like commissions, tips, additional work contracts outside of your regular job, and social benefits don’t count under this definition. Even though their amounts may fluctuate from time to time, typically these are things you may have come to expect and you may sometimes even use their estimated amounts (such as an approximate calculation of your sales commissions or tips) to build your budget around them.
What to Do with a Financial Windfall?
Coming into some money may be a big deal for some people, so it makes sense to use it in the best way possible. But searching for the best or only way to use a financial windfall may set you up for disappointment.
There are no ‘hard-and-fast’ rules when it comes to a windfall. Like anything to do with your finances, it’s personal.
What might be money to spend on luxury items for one person, could be cash assigned to a bill for another.
For this reason, the following list has no particular order. What works for one person may not work for you. Find what resonates with your finances best and stick with it, wherever it falls on the list.
1. Take Things Slow
Spending your financial windfall isn’t a race. There’s not a specific time on how quickly you can spend every last cent, and you won’t get a prize for burning through it as fast as you can.
Taking a slow and methodical approach to your windfall may protect you from overspending. It gives you some time to think if you really need that new car, a TV, and a vacation, or if these things are just reasons to spend more money.
If you come into a considerable amount of cash, you may think you can handle these splurges. But you might be surprised by how quickly you can spend your windfall.
Even the biggest lottery winnings may not be a match for reckless spending. If you don’t stop to consider how these purchases serve you, you may be left with nothing to show for it.
Unfortunately, this is a hard lesson learned by many winners. One study shows people who win the lottery are more likely to go bankrupt in three to five years than the average American.
Take a step back to think about your long-term goals, even if this means putting off spending your money for months. When you give yourself time to weigh the pros and cons of each purchase, you may be less likely to make bad decisions that squander your windfall.
2. Talk to a Professional
Feeling a little overwhelmed by all the possibilities? If yes, then you’re not alone.
No matter how exciting your windfall is, it can be stressful, too. Managing a large sum of money may rarely be simple. It may come with a lot of new responsibilities, fears, and expectations. Depending on how large it is, it could bring huge upheaval in your life in ways that could affect your career and your friends.
Having someone professional to talk to might ease your fears about what how your finances could be managed, since this person is an impartial expert who can advise you on things like how your windfall impacts your taxes and whether investing is a good idea.
3. Pay off Your Bills
You don’t always have to use your newfound cash on big financial gestures. While there’s a time and place for both luxury splurge items and banking investments, sometimes a simple approach is the best.
If bills are piling up, and you’re finding it harder and harder to pay off debt, using your windfall to cover these expenses can be a smart idea. You may also want to use it to pay off any outstanding installment loans you may have.
It may not be as impressive as a brand-new Lamborghini in your driveway, but a stack of paid bills may have a huge impact on your financial well-being.
You could free up the cash you usually spend on repaying these accounts. You may even avoid paying extra interest if you’re able to pay off loans early.
4. Start an Emergency Fund
According to a recent survey, 59% of American adults who participated said that they live paycheck to paycheck. If you can relate to that, you may know how hard it can sometimes be to save money. All your cash may go towards the necessities, so you may not have any left over for a rainy day.
This may leave your finances in a precarious position. Without any savings set aside, you may not be able to afford things that fall outside your usual budget, such as emergencies and unexpected expenses.
They may be an unwelcomed addition to your budget and they are likely to show up whether you’re prepared to take them on or not.
An emergency fund consists of special savings you plan to use on unexpected expenses or repairs and you can tap into this account anytime your paycheck can’t cover these added emergency bills on its own.
It may also help keep you afloat in case something significant stops you from earning money. You may rely on a well-developed emergency fund when you lose your job or suffer a health scare that makes it impossible to work.
The size of your emergency fund depends on what you want it to do. Will it be a backup in case an emergency bill arrives here or there, or is it something you want to rely on in the absence of a regular earning?
You may also have to consider things like the volatility of your work, your health, and your typical monthly expenses.
Generally, you’ll want enough cash in your fund to cover three to six months’ worth of expenses. However, you may want to save as much as eight months’ worth of expenses if your emergency fund will be your line of defence against a sudden layoff or a significant illness.
It may take you a decent amount of time to build an emergency fund of this size, but a windfall may offer you a convenient shortcut to get started.
Sometimes, if you have no other way to pay for unexpected emergencies, turning to an online installment loan may be helpful. One of the benefits of installment loans online is convenience. You may not have to rearrange your day and take time off work to match bank business hours. You can submit your application, review your account, and call to make payments anytime the call centre is open.
Regardless of whether you’ve used installment loans to pay for unexpected emergencies in the past or not, consider using your windfall to set up an emergency fund.
5. Consider Long-Term Savings
If you live paycheck to paycheck, you may be preoccupied with how you’ll put out one financial fire before moving onto the next. There may not be enough money to go around to cover these surprises and your regular bills at the same time.
In moments like these or when you have no other way to pay for your emergency expenses, it may be the right time to turn to a cash advance for help. If you’re unsure of when to get a cash advance, remember that, like an installment loan or payday loan, a cash advance is designed to help cover unexpected emergency expenses — not everyday bills.
But with a windfall, things may start to change. You might be able to get your finances in order and start putting away more money in savings.
When you’re building your savings from scratch, an emergency fund is a good starting point. But once you reach your goals there, you may afford to switch gears from immediate concerns to long-term goals.
So, what are they? Have you thought about when you want to retire, or where you’ll live when you do so? Do you have children that you want to help put through college, or do you want to enroll in classes yourself?
Don’t worry if you don’t know the answers right away. You may not need to know them immediately. They’re simply the kind of questions you can ask yourself when you want to start planning on putting some money towards these things.
You can ask your financial advisor for help, or you can simply go online to search for reliable information that comes up under these topics.
Many people look to 401 (k)s, traditional IRAs, Roth IRAs, and Roth 401(k)s when they’re preparing to retire. These funds may have annual contribution limits, so you’ll want to make sure you don’t surpass them.
Being a freshman in your 30s, 40s, or beyond may be intimidating, but it may also be a rewarding experience. A report from the Bureau of Labor Statistics shows that the average person changes careers 12 times in their lifetime. Upgrading your education late in life may help you jump to a new, better paying job at any age.
Even with your windfall, following a budget is a good idea if you’re going back to school. Angel, our latest winner of the MoneyKey’s Key Thinker Scholarship, suggests giving “every dollar a mission” to make sure you’re on track. To learn more about how Angel intends to stay on budget in college, read this. It might inspire you to do the same!
6. Invest in Repairs
When cash is tight, you may not always have the money you need to take on repairs. The result? Some very important work gets put on the back burner, while you hope nothing further goes wrong in the meantime.
Minor issues, like a touchy furnace or a flashing check engine light, are warning signs that something is wrong. Ignoring these signals doesn’t mean they go away. In all likelihood, they may only get worse the longer you ignore them.
This may be bad news for your wallet, as a bigger problem tends to come with a bigger price tag.
Now that you have some extra money in your budget, you may not have to put off these important repairs. You can attend to any early warning signs with your home or car and fix them before they turn into something much more expensive to repair.
A proactive approach to maintenance may be an investment in your future. For instance, in the case of your home, not only will you avoid costlier repairs down the road, but you may also increase its resale value by taking on certain upgrades.
What is the Best Thing to Do with a Lump Sum of Money?
It’s a good question, but only you can answer it.
Here at MoneyKey, we can’t tell you the best way to spend your money, just as we can’t tell you the best way to use an installment loan. All we can do is recommend you think through your options carefully and use your cash sensibly.
Of course, there’s no harm in celebrating your good turn with a present! You may want to go on a holiday, buy your family some gifts, or splurge on something fun all for yourself — and that’s fine.
Just make sure these purchases fit in with the rest of your finances. You don’t want to pick up spending habits that you can’t afford to maintain.
They say money can’t buy happiness, but it can certainly make life easier if you manage it according to your means.
That being said, it’s not without its challenges.
The hidden danger of a sudden windfall is that it may give you a false sense of financial security as you may be tempted to keep spending until you’ve squandered it all.
Make sure that doesn’t happen by managing your financial windfall wisely. And if it’s a cash shortfall you’re experiencing for any unexpected or emergency expenses, take some time to get more info on how we might help with an online loan.