Sometimes we get lucky through an inheritance, a tax refund, a settlement, a gift, or even winning a lottery. The downside is that we have to figure out what to do with the cash. In such a situation, where do you start?
Understanding how to prioritize your financial goals is important. You might be inclined to splurge on a luxury, invest in a new home (or several), pay down debt, or save up a cushion of cash for future emergencies. Which is the best option?
In most cases, you’ll want to save first to ensure you have an emergency stash of cash in place. After all, finally paying down your car or student loans isn’t going to provide much comfort when you lose your job or your best contract and can’t afford your mortgage or lifestyle.
Beyond a minimum level of essential savings, priorities will differ depending on your life and your goals. Luckily, there are questions you can ask yourself to ensure that you’re doing the right thing with your windfall.
For example, is your debt load worrisome because of its level or interest rate? If so, you may want to apply the spare cash to paying more than the monthly minimum payments. Just be sure to think about how best to eliminate debt among various sources.
For example, do you pay off one credit card or pay a little on all? Do you pay one car loan off or pay both cars loans off.
Also consider whether the cash would be best used to invest more in your 401(k) plan (or equivalent IRA) . If your employer offers a match and you’re not getting all of it, you may want to take advantage of the “free” money by contributing more.
It may also be wise to think about whether you have enough insurance, meaning health insurance, life insurance, long term disability insurance, and liability insurance, in case something goes wrong.
Finally, remember there may not be a “best” decision.
It’s not a one size fits all situation; however, professional advice can help.