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How to Make the Most of a Financial Windfall

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This post originally appeared on Money Talks News.

It’s happened to all of us, at least in our dreams: a lottery win, a big inheritance, a streak of luck at the gaming tables, paying $7 for a $75,000 Renoir at a yard sale. It can happen.

Sooner or later a financial windfall is likely to fall in your lap. Manage it properly, it can improve your quality of life. Mess it up, and it could ruin your life.

But whether it’s millions or just a $3,000 tax refund, Money Talks News founder Stacy Johnson has some tips for how to manage a windfall. Check out the video below, then read on for more advice on getting the most out of unexpected money.

1. Stop

Don’t do anything at first: No shopping sprees, no donations to charity, no lending money to friends and family. Don’t even tell anyone. The last thing you want to do is risk wasting your windfall by acting on impulse, or encouraging friends and distant family to volunteer their assistance or hold their hands out.

The greater the sum, the longer you should take to assess your financial situation and identify some short- and long-term goals. If the amount is significant, a month isn’t too much. It’s not going anywhere.

2. Pay off high-interest debt

Once the planning stage is over, the first step should be obvious. If you have debt, especially the high-interest kind, pay it off. Using a $5,000 bonus to eliminate a $5,000 credit card balance with a 24 percent interest rate is the same thing as earning 24 percent interest risk-free and tax-free – something virtually impossible to do elsewhere.

There are instances where paying down debt makes less sense. For example, if you’re paying 3 percent on a mortgage and can earn 10 percent in the stock market or elsewhere, you’ll obviously come out ahead by leaving your debt intact. But in general, paying interest is bad, and reducing your debt is the best thing you can do with any extra money, windfall or otherwise.

3. Put some aside for emergencies

Fine: You’ve thought about what to do and destroyed some debt. Now can you go to the mall?

Not yet. Put some of that cash aside for a rainy day. According to a survey by Bankrate, 27 percent of Americans have no emergency savings. If you’re a paycheck away from a financial emergency, now’s the time to fix that.

Ideally, you’ll want at least six months of living expenses in an emergency account that’s readily accessible, like a savings account or money market fund. If your job is stable, that should do it. If it’s not, however, the more cash you have, the better.

4. Grow the rest

If you’re fortunate enough to inherit $100,000, the best thing you can do with it is make it into $200,000. How? By investing it. If you’re not sure what to do, now’s the time for a little research. Check out articles like, “Beginning Stock Investor? Here’s All You Need to Know,” for tips like:

  • Don’t be a dope. Day trading, penny stocks and buying based on rumors are sucker bets.
  • Don’t put all your eggs in one basket. Diversify: stocks, real estate — maybe even turning a hobby into a business. Spread it around.
  • Kiss the money goodbye for a while. One of the luxuries of found money or a windfall is allowing you to invest longer term without worry. Things like stocks and real estate take time to blossom. A windfall buys you that time.

5. Seek expert advice

It’s best to hire an expert if your windfall is of considerable size. Interview several financial advisers who are paid by the hour, never by commission. And don’t ever deal with anyone without checking their credentials.

Ask friends for referrals or check the National Association of Personal Financial Advisors, or, preferably, both.

And don’t ever simply turn money over to someone else. Helping you understand your investments is their job. Being responsible for your own money is yours.

6. Enjoy yourself

Last, but definitely not least, use some of that money to treat yourself to a great experience, like a trip to a place you’ve always wanted to see. One of the main reasons to have money is to enjoy it.

Obviously, the weight you’ll put on the steps above will depend largely on the amount of your windfall. Inheriting $10 million is a lot different from a $2,000 bonus at work. But the principle is the same: Take your time, think it through and decide where the money will deliver the biggest bang for the buck.

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