February 22, 2023 · Budget, Investment, Retirement, Savings
Suppose that unexpectedly (and quite luckily) you find yourself with a financial windfall; a surprise (and perhaps surprisingly large) amount of money that you weren’t aware was coming to you. The money could be an inheritance, a lottery win, a payment from the settlement of a lawsuit, a prize from a contest, a gift from a relative, the result of the sale of possessions or investments—or it could originate from some other situation. Regardless of its origin, if you suddenly have a new, sizable chunk of money, then you now have decisions on what to do with it.
So what should you do with the money?
First, don’t rush into anything. Take a few deep breaths, stay calm, appreciate your good situation and don’t hurry into taking any actions you may regret later. This windfall could be a once-in-a-lifetime opportunity and it needs to be approached slowly and thoughtfully.
Consider talking to someone with professional money management experience. Don’t think you’re alone when thinking about how to handle your new money. There are experienced, knowledgeable money management professionals who can guide you and suggest options you may not know about. Contact your current financial services providers to check what advisory services they offer.
Keep in mind tax implications. Depending on the source of the money, it could be considered taxable income or assets by the U.S. Internal Revenue Service. So you have the money, but you may owe some of it to either the federal or state government, or both. That tax status needs to be understood and resolved. This is another reason why it’s important to seek advice from an accountant or from your credit union, bank, or other financial institution where you have an account to understand actual and potential tax liability.
Try not to let the money be lazy when it could be working for you and, potentially, growing. Make the money work for you! If the funds are still in a paper check, or in an account that pays little or no interest, then they are not growing. Think about what you need to use now and what can be saved or invested for later use. There are some suggestions on saving coming up in this post; for example you could…
Add to or create an emergency fund. Finance professionals typically recommend saving the equivalent of three to six months’ worth of living expenses in a separate, readily available emergency fund to offset an unexpected job loss, medical emergency, major car repairs, damage to your home, or other financial setback. That's why an emergency fund is something you will be thankful for when you need it. A dedicated savings, checking or money market account can be set up just to save for emergencies.
Pay down or pay off debt. Pay off as much debt as you are able, such as credit card debt, student loans, or even your mortgage. It may not be possible to pay off more of your debt than you’re already paying, but consider what you might be able to do by using your new windfall to reduce debt. It might make solid financial sense to take out a car loan, personal loan, or home equity line of credit at a lower interest rate, and then use the loan to pay off other, older debt that has a higher interest rate—and then you have more money available to pay off the new loan.
Open specialized savings accounts for specific purposes. Did you know that you can have multiple Personal Savings Accounts at Delta Community Credit Union, and none of these additional accounts require any minimum deposit? That means you can create individual accounts for specific purposes to help you save for important needs and important wants, and keeping the money in separate accounts may make it easier to manage your savings. You might want to open savings accounts for:
Be mature about a Certificate of Deposit. A Delta Community Certificate of Deposit (CD) is another way for your money to grow at a higher interest rate than a savings account. It helps you grow your money, but unlike a savings or money market account, CDs are a time-based deposit. When you buy a CD, the money is invested for a fixed amount of time (fixed-term) and can be used once the certificate of deposit has matured—when the fixed-term investment period is complete. CDs can typically be invested for terms of 6, 12, 24, 36 or 60 months. As an alternative to a CD, Delta Community Credit Union’s Personal Money Market Account earns dividends on savings if you maintain a $1,000 balance and doesn’t lock you into a fixed interest rate or long-term commitment.
Put money in a retirement savings account. Investing your new money now can make a big difference when you’re older. If you use some of the windfall to make an extra contribution to your Roth Individual Retirement Account or a Traditional Individual Retirement Account (IRA), these funds could significantly increase by retirement age. If you don't already have an IRA, you could use part of your money to jump-start one with a good-sized contribution. Annual IRA contribution limits and catch-up contributions in 2023 are $6,500 ($7,500 if you’re age is 50+).
Treat yourself to something fun. If you’ve wanted something for a while—a possession or an experience—but having it now was not financially feasible, then you may want to ponder if you should indulge yourself and get it, now that you can afford it. It doesn’t have to be something big and expensive (such as a vacation home), but it can be something that has important personal meaning to you.
For more information that may help you manage your costs and finances, look into the free Delta Community Financial Education Center webinars on a range of practical, “how to” financial topics. Please visit the Financial Education Center's Events & Seminars page to review and register for its on-demand webinars.
The Credit Union’s blog has more information that could be educational and helpful: