Receiving unexpected income (money you receive in addition to your regular income) can start a series of financial questions as you consider how best to use the funds. Here are some steps to help you make a decision with your financial future in mind.
👩🏻💼 1: Ask for advice
An unexpected income can present financial challenges, especially if you are unprepared. It’s always a good idea to know where to turn to address some of the more complicated and nuanced areas of money management. Consider consulting with a financial advisor, tax advisor, or attorney to help you find the right balance between legal, estate, and tax planning.
Pay off debts
While it may not be the most exciting option when you have a little extra cash, it’s a good idea to prioritize paying off high-interest debts, such as credit cards or personal loans. Decreasing or eliminating debt frees up money for other financial goals and helps improve your credit score.
🚨 2: Increase your emergency fund
This is the perfect time to set aside money for future emergencies, disasters or purchases that are not part of your planning, such as a sudden need to take a trip for a family event, a home repair or an unexpected medical bill, among others. If you haven’t already done so, setting up an emergency fund can give you greater peace of mind and financial security.
👴🏽 3: Contribute to your retirement
Once you’ve saved for a rainy day and paid off your debts, make sure you have enough money for retirement. It’s a good idea to maximize your contributions to your 401(k) plan or Individual Retirement Account, better known as an IRA. When you reach your retirement savings goals, you might consider creating an inheritance for your children or grandchildren, which means they will eventually receive a windfall, too.
📈 4: Start investing
Another way to handle a windfall is to invest it. With the right investment approach, you could grow your windfall income and use it for your medium- and long-term goals, such as buying a home, saving for college or preparing for retirement.
🛍️ 5: Resist the temptation to squander money
It’s hard to resist the temptation to spend money on something expensive that you’ve always wanted, but don’t really need, since the nature of a windfall is that it’s extra money that comes in suddenly. It’s fine to spend a small portion on a treat for yourself or your family. However, the best way to handle a windfall is to be careful with your spending and focus on the future rather than the short term.