There are many reasons you might obtain a lump sum of money, such as inheriting from a deceased family member, receiving severance after being laid off, or even winning the lottery. The situation through which you received the money might cloud your judgment moving forward. You might also be excited — but don’t start celebrating too early.
A massive windfall can be nerve-wracking. You want to do the right thing with your money as soon as possible. Any wrong step could greatly impact your financial future. Right now, you have many options in front of you. So what is the best thing to do with a lump sum of money? It depends on your current financial situation. You might pay off credit card debt, invest in stocks, or take a much-needed vacation. The options are almost endless. But before you make a significant financial decision, consider these four strategies for getting the most out of your lump sum of money without making a crucial financial error.
What Is the Best Thing to Do With a Lump Sum of Money?
Pay Off Debt
The average American household has about $8,000 in credit card debt. The average person’s student loan debt is $31,172. Can you relate? Paying off debt is highly recommended if you suddenly find yourself with a windfall of cash — as long as you don’t have a more pressing situation. Prioritize credit card debt or loans with high interest rates, as these balances quickly accrue bank fees and interest. You may not be in a position to pay off the entire amount, but even a small balance reduction can significantly impact your credit score.
However, paying off all your debt may not be the best decision for your financial situation, so be sure to take your unique circumstances into consideration. If you don’t yet have an emergency savings fund, it could make more sense to save your cash before paying off low-interest loans, as savings account money is more easily accessible in case of an emergency. Talk to a professional to understand the best option for your situation.
Build Up Your Savings
Many financial professionals recommend your savings account contains enough cash to cover three to six months of expenses (not to be confused with monthly income). This strategy is beneficial for most situations, unless you already have a strong savings account. If you were terminated from your job, you may receive severance pay, making your lump sum the main source of financial support until you find a new job. If you are in this situation, it could be a good idea to put your money into a savings account where it can be easily accessed for regular monthly expenses.
However, don’t just throw your cash into a regular savings account. Make sure the savings account is high-interest so that you earn cash over time. Investing your money can yield much more interest, but there is a significant advantage to having access to liquid cash. It will come in handy in case of emergencies like job loss, car repairs, or moving expenses.
Invest In Stocks and Bonds
If you already have your debt under control and have a decent savings account, you might next look at investing your lump sum. Investing in a mixed portfolio of stocks and bonds — or even retirement accounts such as IRAs or 401(k)s — allows your money to work for you over the years. Compounding interest means your money will grow over time and keep up with inflation rates. On average, stock investments generate an annual return of 10%. Your future self will thank you for that.
However, it’s important to consider the tax implications and risks of investing in stocks and bonds. If you want to withdraw cash from your stock or bond investments early, be prepared for high penalties in the form of taxes. Before you invest, be sure that you can get the most out of your money without spending an arm and a leg on taxes in the long run.
Ask a Professional for Advice
A sudden windfall of cash has the potential to change your life, so don’t make a rash decision outside of your means, such as moving to a more expensive home or quitting your job. Before you settle on an option, you need to evaluate the numbers, analyze your overall financial situation, and identify the right moves for your money. But most people don’t have the education or background to do these things on their own.
To make the right choice for your lump sum, press pause and seek input from financial experts. They will evaluate your current financial situation and advise you on what the best decision might be for your future. They can also create a personalized financial plan and recommend smart investment strategies to help your wealth grow through the years.
Get Expert Financial Advice From Dechtman Wealth Management
Not sure what to do with your lump sum of money? The financial professionals at Dechtman Wealth Management have more than 35 years of experience in the industry, and can help you strategically invest your lump sum. We’ll help you understand complex wealth management tactics, as well as tax implications for your sudden windfall.
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