Best 5 Ways to Spend a Lump Sum of Money
Make the Most Out of Your Money
How wonderful when we can enjoy a nice fat check as extra income! Sometimes the windfall is small, sometimes it’s big, and for the super-lucky ones, it may even be huge.
An unexpected lump sum is a lucky happening, and it deserves careful planning on how to use the money, in order to make the most out of it.
Unexpected Windfall vs. Regular Income
What am I talking about?
A windfall, as intended here, is an amount of money that comes to you. Unexpected means that this is an unpredictable, uncertain source of income, like a bonus at work, or a court settlement, that you don’t know if you get it until the time comes.
A windfall has an aleatory nature, which means that it’s related to other events that are beyond your control, and sometimes it depends on risk or luck, like getting good dividends from the stock market or winning the lottery.
Your regular income is expected, and, unless you depend a lot on commissions and highly variable pay, you know how much you are earning and when the check will be deposited. For this kind of predictable income, you should have already a plan in place on how to use it.
Generally speaking, your regular income should cover your fixed expenses, variable expenses, and savings toward your financial goals.
So, while your regular income is pretty much already allocated, you have a lot of choices and options on how to use a windfall.
Make the Most out of Your Money
Examples of Lump Sums You May Get
- Tax refund
- Loan paybacks
- Short job/project
- Found treasure
- Court settlement
What to do with a lump sum of money?
Any windfall should be treated as a precious chance to improve your financial situation.
The first thing you need to do is write down all your options of how to use the money and then go through your list of options and prioritize.
What’s the Best Way to Use a Big Sum?
I love tax refund time, because you hear people cheering about their refund check, and I always hope they use it wisely.
Unfortunately, most people I know go wild when they see a lump sum, they feel like it’s a freebie and they can just splurge it on whatever.
In reality, especially in the case of a tax refund, that’s your money, you worked hard to earn it; the Government has been holding it for you and it's now returning it.
1. Pay Off Debt
Becoming debt-free should be your priority #1, especially if you are paying high-interest rates. Use your lump sum to pay off your debts.
If you have several credit cards, pay them off in full, and then call the company and ask them to close your account.
Make sure no further interests are charged after you paid. You don’t want to close a card that carries a balance.
Also, ask the rep to write a note that states that the account has been closed at your request.
2. Beef Up Your Emergency Fund
We all should have a “peace of mind” saving fund that allows us to take care of anything that may happen in terms of emergencies.
While the amount necessary to provide peace of mind varies from person to person, the recommended amount to have in an emergency fund is 3 times your monthly expenses.
If you don’t have an emergency fund that covers three months’ worth of expenses for your family, your lump sum should go to the emergency fund before you make any purchase.
3. Apply the Extra Money Towards Your Financial Goals
We all have a list of things that we’d like to buy or do, but we kept them on the back-burner because we can’t afford them.
Hopefully, we also have a list of financial goals for which we are actively saving each month.
Once you are debt free and have a nifty emergency fund, you can finally use the money towards your goals and dreams, including buying things, saving for college, or saving for a down payment on a house you’d like to buy.
How would you use a lump sum?
If I won $10,000, I would....
Your First Priority Is Being Financially Stable
4. Investing Your Money
Many options are available for investing a large lump sum of money, and before you choose any particular form of investment, you need to consider the risks and advantages of each opportunity.
Is your attitude to risk low, medium or high?
Do you want capital growth or income, or a bit of both?
What are your plans for the future: retire early, start your own business, or starting a family?
All of these factors and many more have a big impact on which investment choices would be ideal for you.
If you have a big sum of money and no idea which way to go to invest it, I recommend you talk to your financial advisor.
Financial Goals and Dreams
5. Buying Something that You've Wanted for a Long Time
We all have something we have been dreaming to buy, but we have been postponing because too expensive.
A lump sum could be just the thing you needed to finally fulfill your dream.
Whether it is new furniture, a motorcycle, a trip, or anything else, the extra money you received can be certainly used to get it. Maybe you've been waiting to propose to your girl because you could not afford the ring she deserves, this could be your opportunity.
My only advice: before you spend the precious lump sum on anything, look first at your debt situation, and make sure you are not wasting a great opportunity to pay down those credit card balances!
But if your credit is in order, and there is something you really need, go ahead and enjoy the extra money.
Questions & Answers
Why would you close your credit card accounts? Doesn't your credit score depend on the average length of accounts and also having low credit card ratio(under 10%) in order to grow your creditworthiness? If you closed them then you would have no ratio to compare your credit cards. Would that turn out negatively?
The number one goal should be paying off your debts. Since credit cards usually charge high interests, paying the balances off in full is very important. If you have several, I recommend closing the extra ones, starting with those that have the worse conditions and the highest fees. It's ok to keep a couple of credit cards and focusing on paying them off monthly, that's good for your credit. However, having a bunch of open credit lines can actually damage your credit.
© 2012 Robie Benve