Let’s say win a jackpot, or your relative bequeaths you a tidy sum, or you receive a handsome work bonus - what do you do with the money? When most people get a financial windfall, they often throw all caution to the wind and spent the money on shopping sprees, long-desired vacations, buy dream cars, or give it out as “loans” to friends and relatives. By the time they come back to their senses, they usually have diddly-squat in their accounts.
It is estimated that 70 per cent of people who receive a vast amount of money unexpectedly will squander it in only a few years. But with proper planning, a windfall can be a positive game changer in your financial goals. Here are some tips to help you manage unexpected money:
1. At first, do nothing
It is understandable that you feel the need to celebrate your windfall. But to avoid going overboard with spending, it’s advisable that you take a breather. Put the money somewhere safe -- even in a fixed account -- and let the dust settle. Get used to the idea that the money is yours. After the initial excitement passes, you will be in a better position to soberly think about long-term goals. You can then sit down and make a long-term plan, either by yourself or with the help of a financial advisor.
2. Pay off big debts
Being in debt can weigh heavily on your psychological, physical, and financial well-being. If a windfall comes to you just when you are trying to figure out a way out of debt, use a huge chunk of the money to settle your debt. This will have a huge impact on your life and you will feel like a big load has been lifted off your shoulders. If you got into debt due to bad financial choices, avoid making the same mistakes in future, lest you land back into the same situation.
3. Set up an emergency fund
An emergency fund comes in handy when you have unexpected expenses- such as hospital bills not covered by your insurance, major car maintenance, repairing broken home appliances, or even bailing out a friend in need. Financial advisors say that it’s prudent to have three to six month’s income put away in an emergency fund.
4. Spend on something fun
Don’t deny yourself a little bit of fun. Spend a little of the money -- not all or majority of it -- on something fun. If you put all of your windfall money into “responsible” things such as paying debt, you might end up feeling like you missed out on something. After all, life is for living and we should all try to live it to the fullest. Also, being reasonably indulgent can teach you important lessons about money and even spur you to earn and save more. Financial advisors recommend using up to 10 per cent of the money on something you desire. This could be a vacation, wardrobe update, or even a better car.
5. Give it away
If you’ve always felt touched by the plight of the less fortunate, you can now afford to do something about it. You can give as much as 10 per cent of the money away -- whether it’s making a charitable donation, paying church tithes, or taking your parents to a fancy dinner. You can also gift people who have impacted your life positively. According to research, giving brings more happiness than receiving.
6. Buy some time
Time is said to be even more precious than money itself. You can get more money, but you can’t buy more time. But you can buy yourself some time by paying someone to do some tasks for you, freeing you up to either relax or attend to other more important responsibilities. You can outsource tasks which you least like -- such as laundry, housecleaning, or grocery shopping. If your had a large enough windfall, you can even buy more time by moving to an apartment which is close to your job or the places you frequent and reduce the time you spend commuting.
7. Invest in your business
A business needs cash injection from either debt or capital to grow. Use your unexpected money to invest in your business and take it to another level. You can update your equipment, invest in marketing, pay to attend key conferences, buy more stock and so on. You can also put some away to catch up with tax requirements for your business.
8. Build your investment portfolio
How does your investment portfolio look like? The best way to grow your money is to put it to work. Use a part of your unexpected money to invest in stocks, buying important real estate assets, or treasury bonds. Long-term investments will help you secure your future.
9. Save for retirement
Are you building a retirement nest-egg? No matter how old you are, you need to put away some money for retirement. If you haven’t done so already, think about when and how you’d like to retire and the amount of money you will need. Then put away some of your windfall money towards this goal.
10. Try the 50/50 plan
One of the best ways to handle a financial windfall is to use the 50/50 rule. This is where you split the money into two -- use one half for things such as savings, investments, and paying debt and give yourself permission to use the rest on more fun activities. This is a guilt-free approach that will help you have fun, while still being responsible.
11. Seek professional help
If the windfall is huge, it can be overwhelming to handle it all on your own. Look for a qualified and trustworthy financial advisor and pay them to help you. A good financial advisor might cost you a pretty penny, but it will save you a lot more in the long run. Make sure that your advisor is a fiduciary, that is, they put your interests above theirs, and they don’t have a long history of client complaints.
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