When you’re an adult, the feeling of “Christmas” starts to fade away. You may enjoy the holiday, but you don’t get the same feelings of anticipation and excitement. It’s somewhat analogous to growing up in general – First you believe in Santa, then you find out he’s not real, then you become Santa. After that it’s not so fun.
For adults, the feeling of Christmas doesn’t come because of a holiday. It comes from getting extra cash.
Whether it’s a tax return, inheritance or unexpected work bonus, there aren’t many feelings better than suddenly becoming richer. When you spend most of your life struggling to make money, it’s understandable to get a little excited when a pile of it just falls into your lap.
But while there’s nothing wrong with celebrating, extra money isn’t an excuse to spend frivolously. Think of extra money as an opportunity to improve your life permanently. You can waste it all on fancy dinners and expensive jewelry, but where will that leave you in the long run? It’s much better to think long-term.
If you’re looking for responsible ways to use a windfall, here are some of the best.
Save an emergency fund
if you don’t have an emergency fund or it’s fairly sparse, the first thing you should do with extra money is add it to that fund. An emergency fund protects you in case of job loss, temporary disability or your car breaking down on the side of the road.
A study from the Federal Reserve Board showed that about half of Americans couldn’t afford an $400 emergency if it came up. They’d have to pay for it by taking out a loan or selling something in a pinch – possibly racking up interest in the process. An emergency fund prevents you from selling your grandma’s wedding ring to pay the bills.
A basic emergency fund should be at least $1,000, but most experts recommend having closer to three to six month’s worth of expenses saved up. If you have kids or an unstable career, you might want to have up to a year’s worth. The more you have saved, the less you’ll have to worry about using a credit card when facing an emergency or asking friends or a loan.
Pay off debt
A small windfall might not be enough for you to quit your job, but it can be enough to wipe out some debt. If you don’t have the amount you need to get rid of all your debt, then pick your highest interest balance and put your extra money toward that. For example, if you have two credits, you’ll save more on interest and will pay it down faster.
You can also choose the debt with the smallest balance. When you pay that debt off, you can then add the amount you were paying onto the next smallest balance. This is known as the snowball debt repayment method and has been scientifically proven to be more motivating for people paying off multiple balances.
Conquering debt is as much a mental game as a financial one. Putting a big chunk of cash toward your balance will help you feel more in control of the situation, and that much closer to being debt free.
Contribute to retirement
Most Americans don’t save enough for retirement, and many don’t save anything at all. But if you don’t want to work into your 80s, you should use your newfound wealth to start a retirement account.
First, check to see if you’re eligible for an account through your employer. Many companies have 401ks and other plans that also have matching programs. A company match is free money you earn by contributing your own funds to the account. You can contribute up to $18,000 a year in a 401k, not including the employer match.
If your company doesn’t have a matching program or has a long vesting schedule, you can open your retirement account in the form of an IRA. An IRA or individual retirement account can be opened through most major brokerages. You can contribute $5,500 a year in an IRA.
Even a small windfall can grow into a decent nest egg, especially if you add to it.
Save for car repairs
For most people, their car is the most important – and most valuable – asset they own. It’s the way you get to work every day, or out to socialize with friends. Without a car, you’d be stranded or relying on public transportation.
It’s easy to forget about the necessary repairs and maintenance you need to do to make sure your car runs longer, but forgetting to take it in for an oil change could cost you thousands in the long run. Use this opportunity to take your car for a tune up. If you find that your car is in good shape, stash the funds away for any future service appointments. If the mechanic says that your car’s not worth repairing, then you can use the windfall to buy a new car.
Start a 529
If you haven’t started saving for your child’s college education, your new windfall is a great chance to start. You can contribute up to $14,000 a year without paying a gift tax.
A 529 is an investment vehicle designed for college education. Proceeds grow tax-free and can be withdrawn for qualified education expenses. Saving your windfall now could be a huge blessing for your offspring once they’re ready for school.
Some states also provide tax deductions if you contribute to a 529, as well as special matching programs. If you max out the 529 contributions with your windfall, you could also start a Roth IRA for your child if they’re eligible and have earned income.
Contribute to an HSA
If you have a high-deductible insurance plan, you’re eligible to open an HSA. An HSA is a health savings account where you can contribute money for medical expenses that aren’t covered by your insurance. Contributions are deductible on your taxes, and if you have more than $2,000 in an HSA you can even invest those funds in the stock market.
You can contribute up to $3,400 each year for individuals and $6,750 for families and funds roll over from year to year. You can use the HSA to strategically plan ahead for major medical bills. For example, if you want to have LASIK surgery next year, you can start putting money away in an HSA. You’ll save on your taxes and be prepared for that hefty bill when the time comes.
Plus, if you’ve been holding off on some medical or dental procedures, now could be the perfect time to do them. For example, if you know you need a new prescription for your contacts, but have been waiting due to lack of funds, use this windfall to get yourself some new lenses.
Upgrade your house
Upgrading or renovating your home can be one of the smartest things to do with a windfall. That’s because an $1,000 home upgrade typically means $5,000 in equity. What you can do depends on how much you have. A bathroom remodel could cost a few thousand dollars, but adding a pool could be more than $25,000.
Make a list of the dream projects you’ve put on the backburner and what you’d most like to do. Then, compare that list with how much of a windfall you’ve received. Can you afford to tackle multiple things on the list or do you have to choose?
Pick what will make you happiest in the long run, or what will get you the most bang for your buck. A new stove could be perfect for the chef who loves cooking at home, but maybe you really want a steam shower or new bathtub.
After you’ve made the improvements, consider hiring an appraiser to come take a look. If you receive enough of a bump in home value, you could increase the equity in your home. That might make it possible for you to stop paying private mortgage insurance (PMI), saving you hundreds of dollars each year.
This may seem counter-intuitive to the advice you’ve been reading, but it’s not. A successful financial strategy is a sustainable one, and someone who puts every cent towards saving and investing is going to burn out eventually. Sometimes, you have to invest in yourself.
You can still put majority of your windfall somewhere responsible, but consider buying yourself a nice meal or new pair of shoes first. You’ll get the best of both worlds – a treat for yourself and a feeling of accomplishment.
If your mental health has been suffering more than your finances, extra money might be the perfect opportunity to take back control of your life. If you’ve been putting off therapy because of the cost, sign up now. If you’ve been feeling isolated and in a rut, go on a vacation to see the world or even just visit friends or family.
The bottom line
It’s unfortunate that most people squander their windfalls, not realizing how a big lump sum can change their lives. Even by paying off one credit card, you could simplify the rest of your finances and set up a path to financial freedom.
Take each windfall seriously and use every opportunity to spend your extra money wisely. It could be the best decision you ever make.