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What To Do With An Unexpected Surge Of Cash

You may have heard your friends or family talking about an unexpected windfall and felt a bit of envy. A good stroke of luck leading to a relative pile of money can be wonderful, but it comes with it’s own set of challenges. Figuring out what to do next after your big tax return, bonus, or windfall should be both rewarding and eye opening. With a bit of creativity and lifestyle choices, an influx of money can go a long way. 

In this Money Chat, we aim to both excite and set expectations with your newfound money. These tips and tricks can help you find a much needed financial break as you work toward a more stable financial future. 

Use The Windfall To Pay Off Debt

You should consider spending your bonus cash on paying down any debt you may have accumulated. Generally, you want to pay off debt as fast as possible. While many creditors will work with you to establish the best payment plan possible, ignoring debt could lead to legal action involving judgments and wage garnishments. These legal actions are entirely avoidable and often involve reaching out to creditors and establishing a workable payment plan – with a bit of extra cash, that payment plan could get a whole lot easier. For more ways to resolve debt, visit our previous Money Chat on Debt Resolution.   

In terms of what debt to pay off first, typically you will want to pay off outstanding debts, then the highest-interest debt you have. Credit card debt is the highest interest debt the average American owns, but it’s important to know exactly what percentage interest you pay on your credit cards, home loans, or even car loans. If you’ve defaulted on a previous loan, perhaps that should become the highest priority.

Establish A Budget

When immediate debts are taken care of, it’s time to create a working budget. Luckily, many organizations will help you start and create a budget. Establishing just how much money you make versus how much money you can spend in each month will help open avenues that were unseen. When a large amount of money comes into the picture, allocating that money on your budget towards previous debts or towards a more stable financial future will help you see the big picture.

With a working budget, it also becomes easier to see how much you could save each month by cutting back in certain areas or reworking how you spend money. Perhaps you’ve noticed that you spend more on eating out each month than you have allocated for food or the budget shows that you spend too much on clothing or other personal items. Keeping track of your money can help influence how you spend it. 

Learn To Allocate Your Funds

“Spending money to show people how much money you have is the fastest way to have less money.” – Morgan Housel, The Psychology of Money

Money tends to spend itself. Whether it’s $20 as a tip after a nice meal, or quickly spending a few hundred dollars to improve your wardrobe, avoiding the common pitfall of spending money you shouldn’t be spending could be as simple as allocating and forgetting about the funds. Whether it’s through investments, an emergency fund, or storing the money away to work towards a better financial goal – make sure you have an idea for that money. It doesn’t have to be done right away, but it should not live in your wallet. Add it to your new budget and make sure the money doesn’t slip away. 

Invest The Money Wisely

When unexpected amounts of money arrive in your account, the most common advice is to invest your money right away. Acting as though you never had the money in your checking account is good advice, but there are different ways to invest in your future. 

Build An Emergency Fund

Investing may seem like you should put it all on a specific stock and ride the market, but perhaps your first step should be building out an emergency fund. In 2017, a viral survey from Bankrate found that just 4 in 10 of the adults surveyed had enough funds to survive an unexpected $500 emergency

Typically, a “good” emergency fund can support you without income for three to six months. Each situation is different, so there is not one concrete amount, but using your new found money to set your future self up for stability is always a good first option.

Start Funding Your Retirement

As another option, your big bonus could start going toward a workable retirement. If you aren’t already in a suitable 401k option with your employer, consider starting your own traditional or Roth IRA account. Before you quickly move on to the next way to invest your money as retirement is 40 plus years away, consider that 1 in 4 Americans have no retirement savings and the longer you wait to begin, the more difficult it can be to achieve your financial retirement goals. 

An IRA, or an Individual Retirement Account, is simply a way to invest your money now to avoid taxes in the future. As another way to secure your future, consider beginning your retirement planning with simple contributions over your career. For more information, visit our previous Money Chat on saving for retirement. 

Traditional Investments

The stock market is not an easy-to-understand concept, and is certainly not something that can be explained in one section of this Money Chat, but investing a portion of your money into stable mutual funds, or bonds, can get you a more consistent return on your investment than low-yielding savings accounts at a bank. The average return in an S&P 500 Index Fund hovers around 8% while the average savings return is typically 0.01%

For more information on what to invest in and how, be sure to check with your current bank as many of the leading banks including Chase and Bank of America offer ways to connect with investment specialists to go over your financial goals. Deciding what market you want to invest in is a big decision and one that should not be done without talking with your financial advisor. 

Treat Yourself – And Your Passions

Made famous in the hit show Parks and Recreation, “Treat Yo Self” has become something of an anthem for the late-Millennials, Gen Z crowd. But using a small portion of your newfound cash to do something you’ve always wanted to do can ease your mind and your soul. Whether it be going on a budget friendly vacation, or spending a tiny percentage of your money on your favorite hobby, making sure you are happy is incalculable when considering your future

In the same vein, freeing your time for other pursuits or passions can be invaluable when considering your financial goals. Allocating some of the money towards getting rid of your least-favorite time sink – laundry, grocery shopping, or even housecleaning – could allow you the precious few hours to consider what you’d need to begin your own business, or expand your hobby into a side-gig

Avoid Lifestyle Creep

The most common thing you’ll hear after someone comes into a large amount of money is how they ended up spending money they didn’t have. Whether that be from the over 70% of lottery winners that go bankrupt within a few years, or the nearly 20% of professional National Football League players that go bankrupt, lifestyle creep occurs when you spend money to attain a new way of living and then cannot give up those newfound luxuries

While the money you’ve come into can and should be considered temporary, improving your lifestyle to ease mental or spiritual burdens is fine but be sure to prioritize your spending rather than embracing a new lifestyle. Allocating your money, paying off high-interest debt, and then investing in your financial future are good steps to avoid a disaster from your current stroke of good luck.

Final Thoughts

There are many good ways to use unexpected gifts of cash. Whether it be paying off your debts, redesigning your financial goals, or enjoying the little things in life to unwind, windfalls can help you build a solid financial foundation. Whatever the next step is, be sure to spend time thinking about how to protect yourself now and in the future while consulting with your financial advisors to stay protected.

Additional Resources

If you want to learn more about financial literacy or your rights as a consumer, please visit the Receivables Info Resources Page.

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The information contained in this article is meant to serve as general guidance for consumers and not meant to serve as comprehensive financial advice. For questions about your individual circumstance, finances, or accounts, please contact your creditor(s) and/or financial advisor directly.

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Published On: October 20th, 2021|Categories: Expertise|Tags: , , , , |

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