Wondering what to do when you come into money? Getting a small windfall or a large sum of money can feel great, overwhelming, or both. (Plus sad if it’s due to an inheritance or settlement.)
It’s normal to have mixed emotions.
But no matter what, it’s smart to take some time to think about what to do before you take action.
Don’t just daydream either. I’m not talking about “if I won the lottery I’d pay off all my debt and buy a new house” type daydreams.
I’m talking…what if you got an extra $250, $1400, or even $100,000 cash? A lot of money that you weren’t expecting, to be sure, but not a sum of money that could last you a lifetime.
You don’t want to look back and have nothing to show for it, or end up like the lottery winners who go broke.
To help you out, here are some thoughts on what to do when you come into money.
What to Do First When You Come Into Money
The very first thing to do when you come into money is…almost nothing.
It doesn’t matter if it’s a large sum of money or a small windfall. Keep the money safe, but otherwise don’t do anything with it right away. Pause for a bit instead.
Why? Because as the saying goes: act in haste, repent at leisure. That means you may do something in a hurry that you’ll regret later. And once the money is gone, it’s gone.
So give yourself at least 24 hours before you decide anything, and ideally longer. Use the time to make plans and think. (Especially if it’s a lot of money, or you are feeling emotional because of related events.)
If you did somehow win a big lottery jackpot, do your best to stay anonymous. Do not tell family, friends, or strangers. Instead, make copies of the ticket, and put the original somewhere pretty safe. (Like an actual safe or a safe deposit box) Then, talk to the experts. Contact a lottery lawyer, an accountant, and a fee-only fiduciary financial advisor before claiming it.
If you came into a large sum of money another way, contacting a fee-only fiduciary financial advisor is a smart thing to do too. (Along with not broadcasting your good fortune.)
What To With Your Windfall
There are plenty of things to do with your windfall. You can:
- Pay off debt
- Save it
- Spend it
- Donate it
- Or some combination of the above
Try not to get overwhelmed by the choices. The funny thing is that the total will probably seem like both a ton of money and not enough for everything you could do.
1. Use Your Windfall to Pay Off Debt
If your goal is getting out of debt, using your windfall to pay it down can be a GREAT use of the money.
But it’s most likely to make a long-term difference if you were already working hard at paying it off.
That’s because changing your mindset and your actions are HUGE parts of successfully becoming (and staying!) debt free.
Whether you’re using a debt snowball or a debt avalanche, putting it to the next debt or debts in your list can really speed up your progress.
If you don’t already have practice successfully paying off debt, the danger is that you could use your unexpected cash to pay it down and then go right back into debt. So consider getting a little practice first if this is your goal, and hanging on the money for a bit.
2. Save For the Future
This is another good choice for what to do when you come into money.
You can use the money to start or bulk up your emergency fund. Or you can save it for an upcoming expense or a big future goal.
When you are saving for something specific, the goal is to hang on to your money so it’s there when you’re ready to use it. That means putting it somewhere safe, vs using it to try to make more.
Good places to stash the money include a regular savings account at a bank or credit union. Banks and credit unions also offer a certificates of deposit (CDs). Those can be good too if you know you won’t need the money for several months and want to earn a tiny bit of interest.
(I use Capital One’s savings account because it’s easy to create more than one account named anything I want.)
Just be sure that you don’t put more than the FDIC or NCUA insurance limits in per account owner. (Which is a nice problem to have, since the limits are $250,000.)
3. Invest For the Long Term
If you have a lot of money (or even a small sum that you want to start with), investing it for the future is wise.
Investing doesn’t have to be hard. (And again, a fee-only advisor can help with this if you like.)
You can open an IRA account for retirement, a 529 for the kids’ college, or a regular investing account. Vanguard is a great place to do so if you want to invest in index funds. Ally is good for mutual funds and single stocks.
Just be sure to actually make the investments after you open an account, and to know your risk level.
You may also want to invest in real estate, or anything that seems like a solid investment. Just remember that if it seems too good to be true, it probably is.
4. Spend Part of Your Unexpected Gain
Spending some of the money on anything you want is always an option too. And a fun one at that!
That could mean anything from going out to dinner at a fancy restaurant to finally getting a new washing machine that won’t eat your clothes.
Just don’t go hog wild here if you have other things you’d like to do with the money.
And do be aware of any on-going costs that may come with anything you buy. For example, if you splurge on a shiny new car, it will have shiny new insurance costs to go along with it.
Keeping the “spend” part of what to do when you come into money to 10% or less is a good idea. So think about putting that amount aside so you don’t get carried away.
5. Donate To Charity
Donating to charity can be fun and fulfilling too.
Make sure to choose reputable charities where most of the funds really do go toward helping people. (Instead of going to overly large salaries.)
If you choose a local charity, you may be able to see for yourself what an impact your donation has, which is great.
Save any receipts for your taxes. You may also want to tell them not to add you to any mailing lists, and not to share or sell your information. That will cut down on requests for repeat donations.
6. Mix It Up
Of course, you don’t have to just pick one thing! You can do any combination of the above. There’s nothing wrong with using your new-found gain toward more than one goal.
In fact, I would argue that the best thing to do when you come into money is to follow through on whatever plans you had before you got it.
Was your goal to get out of debt and buy a house? Put it toward that.
Working on funding college for the kids or saving for a trip to Disneyland? Ditto.
Your goals and the way you manage money shouldn’t change just because you got a large sum of money. You should just be able to reach them a little (or a lot) faster. Use the windfall to speed up your timeline.
The source of your money shouldn’t change what you choose to do.
Which brings us to what not to do with the money.
What Not To Do When You Come Into Money
Most people who come into a little bit of extra money — whether that’s $20 or $2000 — tend to view it as money they can blow. They buy something fancy, take a trip, or splash out on things for friends and family. And when it’s gone, it’s gone.
So basically….don’t do that. Don’t blow it. Treating yourself and splurging a little is fine. But the key is a little. Don’t go overboard.
Don’t get guilted into taking care of other people’s problems, or donating to places that weren’t your idea.
And don’t forget about taxes and estate planning either. Some or all of your windfall may be taxable. And if it’s a lot, you could end up being taxed a higher rate than you’re used to too. So don’t use it all. You don’t want to end up owing the IRS. Update your will and beneficiaries on any new accounts if you got a life-changing sum.
Finally, don’t go out and change everything about your life. Focus on the parts of your life you already love, and on solving any major problems you may have. But otherwise, stealth wealth can be a good thing. There’s nothing quite like knowing you have money available for the future, and being a good steward of the money.
In Summary, Give It Thought and Make a Plan
No matter what you decide to do with a windfall, do it intentionally. Take your time.
Give your actions and choices thought, and you’ll be a whole lot happier than you might be if all of a sudden that money was just gone.
So, what will your plan be? And if you’ve gotten windfalls in the past, what did you do with them?