Quick—if you got a serious cash windfall what would you do with it?
It’s fun to think about this question, not the least of which since windfalls do happen, at least from time to time. And when they do come, it never hurts to have some ideas.
The way I see it, there are three basic choices—spend it, save or invest it, or use it to pay down (or pay off) debt.
Which you choose depends on your circumstances.
Let’s take a look at three options for a cash windfall:
Option 1: Spend it
I could be wrong, but I think this is often the first choice for most people. We have endless desires for stuff, and when money falls out of the sky—well, you know how that works.
Sometimes spending a windfall is the right thing to do, but I think there’s a line between where you spend it.
It’s always worth spending money if it will create long-term benefit.
A good example is buying a new car. If your car is ten years old and held together by tape and glue, buying a new one will be an investment in your future. But if your car is only five years old and runs well, replacing it is more making a need out of what’s really a want.
Option 2: Save or invest it
Saving a windfall is high on the financial virtue meter.
In fact, if you don’t have an emergency fund, saving the windfall should be the priority. Not having an emergency fund is like playing with fire and this could be a chance to fix that.
Though it sounds kind of boring, savings create peace of mind, which is more valuable than just about anything you could spend the money on.
Taking it to the next level, you can also invest the money, especially if you already have savings.
While it may not provide the immediate gratification that spending will, investing the windfall can turn it into a money machine that keeps giving in the future.
Option 3: Use it to pay down or payoff debt
Much like banking a windfall, paying off debt with it can make you feel better about life! And anything that reduces stress in life is its own special kind of investment.
By paying off a debt—or even by paying one down—you immediately free up your cash flow. In a very real way, that’s like giving yourself a raise!
But not all debts are created equal in this regard.
Paying off an installment loan, like a car loan, student loan or second mortgage, gets rid of the debt for good.
But if it’s a credit card that you’re paying off or paying down, the potential is there to run it back up shortly after paying it off. If that’s the case, you’re really spending the windfall, but doing it with an extra step—paying down the credit card for future spending.
If it’s a credit card you want to pay off, make sure you have the discipline to put it away or to cut it up. Otherwise use it to pay off an installment loan.
Option 4 (surprise option!): Put it aside and think about it for a while
Since coming into cash windfalls is a rare event, you might prefer to take your time deciding so you don’t do something you’ll later regret.
When you’re in a position like that sometimes the best thing to do is nothing, at least for a while.
If you plan to save the money, this step won’t be necessary—you’ll always be able to shift gears later if you need to. But if you spend, invest or use the money to pay off debt you won’t be able to reverse course.
If you aren’t sure what to do, or if there are several reasonable options, the best course of action might be to put the money into a savings account or money market fund for maybe 30-60 days. That will give you time to do some serious thinking.
This might even be a recommended step if your immediate plan is to spend the money.
Of course you don’t have to go down any single road here. You can spend, save, and invest your cash windfall, it doesn’t have to be all or nothing.