Quick—if you got a serious cash windfall what would you do with it?
What’s a serious cash windfall? That number is different for everyone but I think any amount that would make a significant dent in your life (or more). I’m thinking an amount starting at $1,000 and going up from there.
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 or a plan for what you’d do with it. This way when the money comes you can act rationally. A cash windfall is a great opportunity that you don’t want wasted.
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 your cash windfall
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.
The real focus here is what kind of value will you get from spending the money? Think about it before your money burns a hole in your pocket.
Another example is paying for an experience that will have a lasting impression on you and your family. This could be that vacation you were always wishing you could take. Memories will outlast most ‘things’ you would buy.
To sum up: Spend on something that will be useful long-term for you or will give you life-long memories (have fun!).
Option 2: Save or invest the cash windfall
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. Open up an account (I like online savings accounts) where you won’t touch the money so you’ll have it in an emergency.
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. Reducing your stress over money is a huge lifestyle upgrade.
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.
Here you have an option to build up retirement savings, start a college fund, continue your education (invest in yourself), or even put that money towards a business.
Option 3: Use the cash windfall 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 your cash windfall 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.
Feel free to write out a list of ideas for the money and then consider the pro’s and con’s for each.
This might even be a recommended step if your immediate plan is to spend the money.
Final Word on What to do With a Cash Windfall
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. Like most aspects of personal finance the decision for what to do with a cash windfall is, well, personal.
When my mother passed away in Nov 2011, there was a little money left in the estate. When I say “a little”, I mean roughly $23K for each of the kids. At the same time I was settling the estate, I decided to leave my job and go back to consulting. (I missed the travel and I wanted to make better money.) Fortunately, my job needed to lay off a couple of people and I volunteered. Doing so, I got a severance package. Now armed with almost $40K, I paid off every credit card I owed on. It was that windfall that got me out of credit card debt for the first time ever in my adult life. What a freakin’ relief.
Then, with the additional money that I started making from my new job, I was able to pay off the $11K note on my car.
Now, aside from my house (with an $850/month mortgage and only a few years left to pay on it), I’m completely debt free AND I’m putting money away for retirement.
Roger Wohlner says
Good post, relevant here in IL in light of the recent big Mega Millions winner downstate.
Option four is generally the route suggested by most financial advisors. A major windfall not only represents a major financial change, but also a potential major life change. Aside from perhaps some pressing needs such as urgent debt and the like, there is no hurry to do anything with the money. People in this situation should step back and formulate a plan for the money that is in line with their goals and values. As with the downstate Mega Millions winners, they sought out the appropriate team of advisors before claiming the prize.
Not all windfalls are of that magnitude, but even a much smaller influx of cash deserves planning an thought prior to any actions. It is always best for folks to take a long-term view in these situations.
Glen Craig says
Time always seems to help with money decisions.
Jessica, The Debt Princess says
Option 4 is what so many of the lottery winners need to do. They need to sit it aside and consult people smarter than they are. I hate stories for winners who go an blow their money. No one w/a smart team behind them should blow through millions of dollars in their life time. But we know how easy that lure of money is when you’ve had none.
Thanks for linking to my post over at Enemy of Debt.
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Darrell @ Debt and Buried says
Paying off bills is the only way to go. That guaranteed return (whatever rate you’re paying on those credit cards) can’t be beat in the current low-rate banking environment.
I would invest it. My only debt is a small mortgage which will be paid off in the next 5 years.
Christina @ Northern Cheapskate says
I think you should almost always exercise Option #4 when you receive a windfall – especially if it is an inheritance. You don’t want the emotions of the situation clouding your judgment.
I think another option to remember is that how you spend your windfall doesn’t have to be “all or nothing.” You don’t have to put it all toward your debt or all into your savings. You can do more than one thing.
When my grandfather passed away, he left me about $10,000. I paid off some debts, and used the rest toward a new kitchen range and some furniture. I was able to enjoy the windfall by paying down debt (a big goal) AND splurging on something we still enjoy years later.
Jenna, Adaptu Community Manager says
I would put it towards my house remodel. Every little bit helps.
Frugal Portland says
I’d put it toward my student loan, no question about it.
Secretly Network says
I agree with @Christina
Young Professional Finances says
I would pay off my student loans if it was large enough – if it wasn’t then I’d probably just save it for now. Psychologically, that would make me much happier than paying off just a portion of my student loans – even if that doesn’t make as much sense.
Glen Craig says
Yeah, paying off student loans and being done with them would feel good.
Paul @ The Frugal Toad says
Fully fund my children’s 529 accounts so they won’t need to take on a student loan and then invest the rest.
Glen Craig says
That’s pretty cool. But make sure you have your own retirement covered too.
My boss once told me a story about how he got a huge client once that is applicable here. He once took over a client who had a death in the family and he was in charge of delivering a VERY large death benefit. They were at the time trying to find someone to manage the money and everyone was giving their ideas for the money.
After delivering the check they asked what he would do and he said he would do nothing. They just lost a family member, put the money in treasuries and just grieve and wait. Only after that period has passed can you make rational choices.
I thought it was an interesting story
Glen Craig says
Good story, thanks.
Really, who could expect to make rational long-term money decisions when you’re mourning a loved one? Putting the money away for a bit sounds like the right thing to do.
Roger Wohlner says
Evan I think doing nothing for awhile after receiving a large windfall, especially under the circumstances that you described, is what any responsible financial advisor would suggest as well.
Forget financial professionals for a second, I wonder how many family members come out after a lump sum has been paid talking about the next big thing? the next no-fail business?
A very timely post for me, and especially the last couple of comments. I have received a couple of “windfalls” these last two months. First I started a full-time job; two-fold windfall. I hadn’t worked a full-time job in over 6 years (my and my husband’s choice) plus had been on unemployment for the past 6 months. The next day after I was offered the full-time job I was also offered another part-time job with my former company, which I accepted. It is only for a couple of months, approximately two Sundays a month. Finally I received a distribution from my father’s estate, more than $1K but less than $23K. I deposited that check into my savings account where I plan to leave it for right now. Yes we have debt plus I have a small amount on my student loan. However the last couple of years of my father’s life I had to deal with a great deal of stress not only with my father’s condition (he had Alzheimer’s) but also from my oldest sister fighting with the rest of us over his care. Even after he died it was a fight to get his estate settled. I must also mention that my husband had to be rushed to the hospital back in March and had several surgical procedures done. I am now just catching my breath from all the craziness of last year and this year (there is a lot I am leaving out). We are paying down debt (credit card and student loan), setting some aside in the retirement accounts, splurging just a little and discussing what to do next. We are making sure to not rush into anything until our emotions settle down.
Stefanie @ The Broke and Beautiful Life says
I use a percentage budgeting system, so I would divvy it up and put a percentage towards future expenses, a percentage towards savings and retirement and a percentage towards FUN STUFF!
John Wedding says
I’ll cast another vote for Option 4! That’s a wise thing to do regardless.
Your article serves a great purpose, which is to get people thinking about what they’d do with a windfall. The best time of all to do that is before the check hits the bank.
Still better is to re-evaluate the plan to see what has changed since, and that’s what Option 4 gives you the opportunity to do.
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