What Is a Windfall and How Do You Manage One?

No matter how you might have come upon a windfall of money, it’s important that you know how to properly invest it. This extra cash is a great opportunity to improve your financial situation, but without a plan you can easily squander your good fortune. 

There are several steps you can take to make the most of your newfound income. 

1. Pay Off Debts 

While paying off debts is not nearly as fun as it would be to buy that new purchase you’ve been eyeing or booking a trip to your dream destination, it’s a wise financial move to make for your future.

A sudden cash windfall can seriously help alleviate financial stress and help you get caught up on your debt obligations, such as student loans, mortgages, or credit card debt. Eliminating all or even some of your debts will free up your monthly cash flow and allow you to save money on interest rates by paying off debt early. 

2. Create or Add to an Emergency Fund

Life is unpredictable and, just as unexpected as a financial windfall, unforeseen events can severely catch you off guard and hurt you financially if you aren’t prepared. That’s why having an emergency fund is vital and building it up is one of the first things you should do with your windfall assets.

Emergency funds are typically cash accounts separate from your primary checking and savings accounts with enough funds to cover 3-6 months worth of living expenses in case of income loss or other unforeseen problems. In preparation for life’s curveballs, dedicating a portion of your windfall to an emergency fund will give you more financial peace of mind. 

3. Contribute to Your Retirement 

No matter how old you are when you receive a cash windfall, you can use that extra money to contribute to your retirement nest egg. If you have an employer-sponsored retirement fund, such as a 401(k), or a retirement savings account, such as an IRA, you can use your windfall to fund these accounts to the maximum annual amount allowed by the Internal Revenue Service (IRS).

By doing this, you’re allowing your investment to grow and potentially provide you a greater return when it’s time for your retirement. Maxing out your retirement fund contributions each year allows you to better take advantage of compound interest, which can grow a single windfall into longer-term gains.

4. Build Wealth Through Investments

Investing is a great way to augment your windfall benefits and make them last. There are endless investment opportunities that you could look into. Among them are stocks, bonds, rental properties, business startups, and mutual funds, just to name a few.

Ultimately, the types of investments that are right for you will depend on several factors, including how much money you have to invest, how much risk you’re willing to take on, and how long you’re willing to wait for your funds to grow. Keep in mind that diversifying your investments might be the best way to minimize risk.

5. Start a Business

If you’ve got a business idea and a dream to be your own boss, why not use a portion of your financial windfall to help fund it? If you create a successful business, you are maximizing your windfall assets by using it to grow your business earnings.

A financial windfall can also offer you the breathing room to help reevaluate your career goals. Maybe you are not fulfilled in your current position and are looking for a change. With the extra funds, you can create a plan to leave behind a job you don’t enjoy, while charting a path toward a new career.

6. Spend Sensibly 

After doing all, or most, of the above, it’s now time to treat yourself. While you’ll initially want to hold off on splurging away your windfall cash, it’s OK to put some of the money aside to use for sensible spending. Maybe your home could use some upgrades or you’ve got your eye on a new car. Prioritize what matters most and use some of your newfound cash to improve your quality of life. 

How much you set aside depends on you and your financial obligations, but don’t forget to set some boundaries. Consider a budgeting technique like the 50/30/20 rule, in which you divide your after-tax income into 3 spending categories: 50% for needs, 30% for wants, and 20% for savings or paying off debt.