Have you received some extra money? What are your plans for it? It could be a tax refund, lottery winnings, inheritance, pay raise, or something else.
Do you splurge when you get a tax refund? Why? It was your money all along, and you lived without it. Since you “saved” it all year, why not keep saving it? A large refund means that you gave the government a large interest-free loan. Even though I should adjust my withholding to owe a small amount (it’s hard to get it just right), I normally get a small refund, and it always goes straight to my money market checking (which earns interest). Most of my emergency fund is in my money market account. When I have enough in my money market, I write checks to my investment accounts.
A long time ago, I received a somewhat small inheritance from a great-grandparent. I immediately invested it in a mutual fund. About two years later, I was able to make a down payment on my house. Since I avoid fees, it was important to pay at least 20% up front to avoid paying PMI (private mortgage insurance).
When I received a small inheritance from a grandparent a few years ago, I originally intended to save it for a new A/C. Instead, I invested the money in my Roth IRA. Fortunately, I have enough in my money market to pay for my new A/C that’s getting installed next week (if the weather cooperates).
Instead of splurging, here’s a list (in order) of what to do with a windfall. If something doesn’t apply, move to the next item.
- Pay off/down credit card debt – This is likely your most expensive debt. Once you’ve paid it off, don’t charge more than you can pay in full every month.
- Pay off/down other non-mortgage debt – Pay debts with the highest interest rates first. If you have a good mortgage rate, investing in the market is better than paying off your mortgage early.
- Deposit it in your emergency fund – There’s not a set amount, but I like to have about a year’s worth of expenses easily available (not in the stock market). My cash accounts are lower than normal since my income dropped drastically last year. I have never lived paycheck to paycheck, and I don’t plan on ever living that way.
- Invest it in your IRA* – If you don’t have one, you should open one. *Just verify your eligibility and limits.
- Invest it in a mutual fund that isn’t an IRA – In addition to investing for the sole purpose of letting your money work for you, this could also be money you intend for large purchases such as a new car, house, vacation, etc.
- Treat yourself a little – If you’ve had a really large windfall, and all five have been covered, give yourself a little reward! Of course, you might not have any money left after #5. I know I wouldn’t (unless I win the lotto).
- Spread the wealth – I’ll be helping dozens of people and organizations when I hit the lottery jackpot. Donations are part of my regular expenses, but they’ll increase drastically after winning the lottery.
I hope this helps!