Best 5 Ways to Spend a Lump Sum of Money
What Are the Best Ways to Use an Unexpected Sum of Money?
Any windfall should be treated as a precious chance to improve your financial situation.
Once you've got your hands on a lump sum, you should plan carefully how to use it, taking care of the most important expenses first.
Here are the best 5 ways to spend a lump sum:
1. Pay off your debt
2. Beef up your emergency fund
3. Apply the extra money towards your goals and dreams
4. Invest your money
5. Buy that expensive thing that you've wanted for a looong time
Keep reading, I'll explain each one in detail below.
Make the Most Out of Your Money
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.
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.
Unexpected Windfall vs. Regular Income
What qualifies as an unexpected sum of money?
A windfall, as intended here, is an unusual 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
Consider all Your Options and Choose Wisely
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 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.
Look at the lump sum as a precious chance to improve your financial situation or make a dream come true.
Before you spend it, consider all your options and choose wisely.
Below are the five top ways to spend a lump sum.
Unlock Your Dreams
1. Pay Off Debt
Make your number one goal paying off your debts, this is especially true if you are paying high-interest rates. Look at all your loans and lines of credit and determine which ones are charging you more. Start by paying off the most expensive debt, then use the extra money to tackle the less expensive.
Since credit cards usually charge high interest, you should aim to pay the balances off in full every month. If you have several credit card accounts, I recommend closing the extra ones, starting with those that have the worse conditions and the highest fees. To do that, pay them off in full, or transfer the balance, and then call the company and ask them to close your account. Make sure no further interests are charged after you pay. Never 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.
It's ok to keep a few credit cards, focusing on paying them off monthly, that's good for your credit. However, having a bunch of open credit lines, even if you don't use them, can damage your credit.
- Make becoming debt-free your priority #1.
- Use your lump sum to pay off your debts.
- Start from the most expensive debt, then move to pay off the less expensive.
- Close any extra credit line accounts.
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.
The amount necessary to provide peace of mind varies from person to person, in fact, 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 purchases.
3. Apply the Extra Money Towards Your Goals and Dreams
We all have a list of things that we’d like to buy or do but are kept 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.
Don't have financial goals yet? Read more about how to set smart financial goals for yourself and your family.
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 that Expensive Thing that You've Wanted for a Long Time
We all have something we have been dreaming to buy, but we have been postponing because it's too expensive.
A lump sum could be just what 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.
6. Learn How To Save
Why wait for the next unpredictable lump sum when you can save for your own spending fund?
Cutting expenses, resisting buying impulses, and saving your hard-earned money can truly change your life, for the better.
Learn how to live below your means and be happier and debt free in the long run.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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.Helpful 1
Is it ok to use the emergency fund in case of a missed paycheck?
Absolutely, that is exactly what an emergency fund is for, to keep you going in case something happens or if you lose your income, for a reason or another.
Just make sure that, as soon as the paychecks start coming in again, you tighten the belt a little and focus on replenishing your emergency fund.Helpful 2
© 2012 Robie Benve