Have you or are you about to come into some windfall money? Do you know what you are going to do with it? Here is a guide of what to do with windfall money.
What is windfall money?
Windfall money is unexpected money you receive either unexpectedly or as a one-time payment. Some examples include gifts, inheritance or lottery wins. Its money you haven’t budgeted on spending, so you don’t need to use it for day-to-day expenses.
Options
Here are some options of what to do with windfall money.
Spend it
The most fun thing you can do is to spend it. Perhaps you have something in mind already? Or you can just blow it all on impulse purchases? No?
Save it
Why not save it? Stick it in the bank until you need it or you can think of something to spend it on. Still doesn’t feel right?
Invest it
Ok so spending and saving it doesn’t seem to be then answer, then why not invest it? Buy some income producing assets that will make sure it grows in pace with, or outstrips inflation. Sensible but boring.
Give it
May be its just too much hassle, why not give it away. That will make you feel good about yourself, but if it was a gift to you, what message does that send to the giver?
Pay off debt
Aah why not pay off debts with it. You could really make a dent in your credit card payments or even pay off some of your mortgage. Like investing, it’s sensible but boring.
Some combination of the above
I was being facetious in the options above. There is no right or wrong answer to the question of what to do with a windfall, the answer will be unique to you and your circumstances. A combination of some or all the options might be the best way to use your windfall.
Answer these questions
To help you decide I’ve put together some questions you can ask yourself.
Is there anything you’ve really wanted to buy now? Are you already saving up for something which the windfall will cover? Then this is the answer.
How long until I need it? If you don’t need to spend the money now and you don’t want to fritter it away on things you don’t really need or want. How long is it till you think you will need the money. If you think you will need some or all of it within the next year, then putting it into your savings account would be sensible. If not, then consider longer term investments which will help it grow.
Do I have short term bad debt to pay off? Credit card debt, loans, overdrafts are a drain on you finances. Your windfall could really help you keep your head above water.
Will the windfall cover any of the debts? It may not be feasible to use all your windfall to pay off some of a large car loan as you will not receive the benefit of removing that payment and your windfall will be gone. But certainly if you could smash away some credit card balances then go ahead.
Where are you on Dave Ramsey’s baby steps? Dave Ramsey has a great model to work with. Check it out here to see where you are on your journey. This could give you a steer on what to do with your windfall.
What I would do with windfall money?
If you are still not sure what to do, here is what I would do. This is not financial advice, but it might be instructive.
- Pay off any bad debts if they are lower than the windfall. If I had any bad debt (which I don’t anymore) I would pay off any credit cards, loans or overdrafts straight away if they are lower than the windfall. This is so I can get an immediate benefit of reduced payments every month.
- With whatever is left I would divide into four pots in the proportion 10:30:30:30
- give 10% away to good causes or as gifts to others.
- 30% I would save for a rainy day or for emergencies
- 30% I would invest into some income producing asset
- The last 30% I would spend on whatever takes my fancy.