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What Should I Do with a Sudden Windfall?

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Question: What Should I Do with a Sudden Windfall?

When you receive a sudden windfall of money from an inheritance, a settlement or just as gift you may be wondering about the best plan of action for your money. This extra money is an opportunity for you to improve your financial situation. Many people often fritter away the money because they do not have a specific plan for it.

Answer:

First, you should consider the tax implications of the money that you receive. It depends on where the money comes from as to whether or not it is taxable. You should talk to your tax accountant or a professional to determine whether or not the money is considered exempt from taxes. Most money is not, and so you should set aside enough money to cover the taxes or pay the taxes now.

You should allow yourself a small percent to use for your enjoyment or entertainment. Generally this should be no more than ten percent of the money. Use this money wisely. If you shop the sales and wait for prices to drop you will be able to get more for the amount of money that you spend. You may receive financial peer pressure to spend all of your money on fun instead of using it wisely.

The rest of the money should be applied to your long-term financial plan. This plan should be based on your goals and should go with your investment strategy. If you still have debt payments you can use this money to pay off your debt. However if you are not committed to staying out of debt, absolutely one hundred percent committed then you should invest the majority of the money. Otherwise you will simply run your debt back up in a few years and you will have nothing to show for the windfall. If you already have a firm financial plan the first step should be to get out of debt.

After you have gotten out of debt you should create an emergency fund of about six months of your income. This money should be put in a high yield savings account. This money should only be accessed for true emergencies such as a job loss or medical emergency. For all other expenses you should plan and save for them.

After you have done this you should invest the rest of the money. The safest and easiest way to invest the money is to choose good quality mutual funds with a high annual yield. You should talk to a financial advisor about which funds to choose. You may find a financial advisor through your bank or through referrals from a friend. Mutual funds spread the risk over several stocks, but you should also diversify your investments over a few different mutual funds, and mutual fund types in order to minimize your risk.

Another option to consider is purchasing a home. If you have not already purchased a home this money may make an excellent down payment for the home or purchase it outright. You may choose to invest a large portion of the money and use some of it on a down payment. If you do purchase the home outright you should invest the amount that would be your house payment each month so that you can really begin building wealth.

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