If you’ve received an inheritance or other financial windfall, such as a legal settlement or a payout from the sale of a development company or other business, it may be tempting to fund that lavish vacation or another beyond-the-budget item you’ve had your eye on. You may be able to pull it off but do yourself a favor and make sure you have your other financial bases covered first.
Understand What You’ll Receive
No matter the source of your increased wealth, be sure you understand exactly what you’re getting. This piece of advice is especially true for an inheritance that could include money now, money later, real estate, and other assets. Read through any legal papers describing the windfall. If you’re not comfortable with the legalese, hire an attorney to help.
Consult With Professionals
Even if you consider yourself to be financially savvy, take the time to consult with experts who can assist you in making wise decisions. These might include a financial planner, an accountant, and an attorney, and an insurance specialist. They can help you see the big picture of your finances, recognize any legal considerations, and plan for upcoming tax payments or new insurance needed.
If you don’t already work with these professionals, look for those who have helped others with similar situations. Get references, check their background, and never work with someone you don’t completely trust.
Pay Down Debt
Because interest can add up, it’s always a good idea to pay down debt when you can, including student loans, home loans, car loans, business loans, credit cards, and mortgages. Pay off the accounts with the highest interest rates first while making minimum payments on the others. When the first is paid off, move on to the debt with the next-highest interest rate, and so on.
There is one caveat here. If you have the choice between paying off debt and putting the same chunk of money into savings, check the interest rates. If you can make more putting the funds in savings than you can paying off the debt, continue to make the minimum payments on the debt and save as much as you can.
Boost Savings and Retirement Funds
Now is also a good time to boost your savings and retirement funds. Every household should have an emergency fund of at least six to eight months’ worth of basic expenses to cover situations like unexpected medical expenses, extensive household repairs, or temporary income losses. If you think this step is unnecessary, consider that it’s better to have a cushion in place and not need it than to need it and not have it.
Retirement is another area that might seem superfluous, especially if you’re young. But starting a retirement fund in your 20s gives you a huge advantage over someone who does so later in life. If you haven’t started a retirement fund yet and are not comfortable with this “added expense,” consider it a gift to someone you love very much: Future You.
Donate to Charity
Maybe you’ve always donated money to organizations you support. Maybe you’d like to start. Either way, there are many approaches to giving and nonprofits go to great lengths to make it easy to do so in a way that’s comfortable for you:
- One-time gift. You make a donation one time for a dollar amount you choose. Keep in mind that you often have the choice between levels that may bring certain rewards, such as mentions in a publication or gifts back to you.
- Sustaining membership. You make a commitment to pay a certain amount per month or year. You can often use a “set it and forget it” approach by allowing the organization to automatically take the money from your checking account.
- Sponsorship. If you own a business, you can purchase a sponsorship to a fundraising event put on by the organization.
- Fundraising auctions. Many fundraising events include the opportunity to bid on products and services from local businesses. You can bid any amount, so be generous!
- Legacy gift. You leave the organization a set amount in your estate plan. This is something your attorney can help you do.
Say you use the suggestions above and you’re able to pay off your mortgage in a year. Rather than immediately thinking about the diamond jewelry you want to buy, take a step back and see what options you have. Do you have other debts you can pay off? Are your emergency savings and retirement on track? Are there more organizations you’d like to donate to? Have you had any new expenses come up, such as college tuition for your child?
If you’ve taken all the above steps and feel confident in your decisions, go ahead and plan that vacation. You’ll enjoy it all the more, knowing that your financial life is in good order.
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