If you’re like most people, your regular income usually comes in the form of a monthly or weekly paycheck. It’s what you use to pay the bills, feed your family or go on the occasional vacation.
But every now and again, you might receive a large amount of money, unexpectedly. Sure, you could win the lottery. But more likely, that extra lump sum will come from something like an inheritance, a bonus at work, tax refund, court settlement, or by selling investments.
So what, exactly, should you do with a lump sum of money? While it might be tempting to spend it all on something lavish, consider instead how you could use it to achieve your financial and personal goals. Because a proactive decision today could pay big dividends tomorrow, putting you on the path toward a future you can feel confident about.
Here are four ways to spend a lump sum of money.
1. Pay Down Debt: One of the best long-term investments you can make is to pay off high-interest debt. Take, for instance, credit card debt, which likely costs you between 10% and 15% a year. That’s much more than you can reliably make by investing your money. If you can’t pay off your balance in full, paying it down can still make a big difference by reducing your monthly interest, which helps you pay off the full amount faster.
2. Build Your Emergency Fund: Do you have at least $1,000 saved in an easily accessible emergency fund? Every household should. Urgent expenses—like a car repair or home repair—can pop up at any time. If you have the money available, you won't have to turn to credit cards to cover the cost.
Another smart rule of thumb: to protect against job loss, you should ideally have three to six months of basic living expenses saved to cover your bills while you look for other work.
3. Save and Invest: If you’re well off financially right now, then consider how you can grow your lump sum of money to support your future. Some options in this category include:
- Take a look at your retirement accounts and consider whether you are on target with your savings goals. Consider adding your windfall here. Depending on the type of account, a tax deduction for making that contribution may be available.
- Thinking about buying a home? Use your money as a down payment or to cover closing costs. Switching from renting to owning can be a significant financial boost, depending on your specific situation.
- Invest the money yourself so it can grow and you can use it in the future for whatever your wants or needs might be. A balanced portfolio of stocks and bonds tends to get fairly consistent returns over the long run.
4. Treat Yourself: Even if you use most of the lump sum for one of the above purposes, consider holding back at least a little of it to spend on something that you’ve wanted for a long time. Whether a new TV, furniture, or a vacation, treating yourself can give you an emotional boost rather than that resentful feeling that you didn't get to enjoy your unexpected windfall.
Need help making a financial plan? Our investment professionals? know just where to begin.