How to Use Unexpected Money
Pay off high-interest debts., Build an emergency fund., Purchase necessities., Divide the money., Save if you don’t know what to do with the money., Donate to charity., Give money to family wisely., Calculate how much you’ll owe in taxes.
Step-by-Step Guide
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Step 1: Pay off high-interest debts.
Use your windfall to pay off credit card or other debt with high interest rates (14% or higher).
Paying off this debt is like earning money on an investment.You’ll save money now—and in the future.
In addition to credit cards, other high-interest loans include payday loans, car loans, title loans, and some private student loans.However, you don’t need to pay off all debts, especially if you have a large enough windfall to invest.
For example, a mortgage with a
3.5% interest rate is equal to about
2.3% after taxes.
If you invest the money, your rate of return should exceed this amount, so it’s probably best not to pay off your mortgage in this situation. -
Step 2: Build an emergency fund.
Everyone should have money saved in case of emergencies.
Financial experts recommend that you have between three and six months of expenses saved in cash.If you don’t have that much money saved, then open a savings account and deposit the extra money.
Of course, your emergency fund can be even larger.
Save up to twelve months of expenses, if possible. , You might have delayed spending money on something—new tires for your car, new work clothes, dental work, etc.
Now is the time to spend money on these pressing necessities.You might not be able to distinguish between a “necessity” and a “luxury.” For example, repair work on your car is a necessity if you need it to get to your job.
Buying a new car because you want a newer model is a luxury, provided your car can still run once repaired. , If you get a $6,000 tax refund, you don’t need to spend it all on your credit card debt or save it all in your emergency fund.
Instead, you can use the 3-3-3 rule.
Apply one third to your debt, one third to your emergency fund, and spend the final third on luxuries.
This way, you’ll benefit financially but also be able to have some fun., You should treat extra money like your regular money.
To keep yourself from spending the money, you can immediately deposit it into your savings account and forget about it., Another option is to give your unexpected windfall away.
There are thousands of charities out there, and they accept contributions big or small.
Even better, you will be able to claim a tax deduction when you file your annual taxes., If you let people know you’ve come into money, you can expect family and friends to hit you up for a loan or a gift.
Don’t feel obligated to help people out financially.
Instead, think of how you can help them in other ways.For example, if someone needs a new car, you don’t need to loan them money.
Instead, let them borrow your car a couple times.
Alternately, you can help them find a part-time job to save for their new car.
If you turn down family members, don’t feel obligated to give a long excuse.
Instead, just say “No” but then talk about how you will help them.
Of course, you can keep friends and family from hitting you up from money by not talking about your unexpected windfall., Your lump sum might not be worth as much as you think.
In particular, you may have to pay taxes on it.
If you won the lottery, for example, then your winnings are taxable.
Other unexpected money won’t be taxable.
For example, you might have already paid taxes on a bonus.
Check your pay stub to see.
Also, some inheritances aren’t taxed.
If you don’t know whether you’ll owe taxes, then meet with an accountant who can advise you. -
Step 3: Purchase necessities.
-
Step 4: Divide the money.
-
Step 5: Save if you don’t know what to do with the money.
-
Step 6: Donate to charity.
-
Step 7: Give money to family wisely.
-
Step 8: Calculate how much you’ll owe in taxes.
Detailed Guide
Use your windfall to pay off credit card or other debt with high interest rates (14% or higher).
Paying off this debt is like earning money on an investment.You’ll save money now—and in the future.
In addition to credit cards, other high-interest loans include payday loans, car loans, title loans, and some private student loans.However, you don’t need to pay off all debts, especially if you have a large enough windfall to invest.
For example, a mortgage with a
3.5% interest rate is equal to about
2.3% after taxes.
If you invest the money, your rate of return should exceed this amount, so it’s probably best not to pay off your mortgage in this situation.
Everyone should have money saved in case of emergencies.
Financial experts recommend that you have between three and six months of expenses saved in cash.If you don’t have that much money saved, then open a savings account and deposit the extra money.
Of course, your emergency fund can be even larger.
Save up to twelve months of expenses, if possible. , You might have delayed spending money on something—new tires for your car, new work clothes, dental work, etc.
Now is the time to spend money on these pressing necessities.You might not be able to distinguish between a “necessity” and a “luxury.” For example, repair work on your car is a necessity if you need it to get to your job.
Buying a new car because you want a newer model is a luxury, provided your car can still run once repaired. , If you get a $6,000 tax refund, you don’t need to spend it all on your credit card debt or save it all in your emergency fund.
Instead, you can use the 3-3-3 rule.
Apply one third to your debt, one third to your emergency fund, and spend the final third on luxuries.
This way, you’ll benefit financially but also be able to have some fun., You should treat extra money like your regular money.
To keep yourself from spending the money, you can immediately deposit it into your savings account and forget about it., Another option is to give your unexpected windfall away.
There are thousands of charities out there, and they accept contributions big or small.
Even better, you will be able to claim a tax deduction when you file your annual taxes., If you let people know you’ve come into money, you can expect family and friends to hit you up for a loan or a gift.
Don’t feel obligated to help people out financially.
Instead, think of how you can help them in other ways.For example, if someone needs a new car, you don’t need to loan them money.
Instead, let them borrow your car a couple times.
Alternately, you can help them find a part-time job to save for their new car.
If you turn down family members, don’t feel obligated to give a long excuse.
Instead, just say “No” but then talk about how you will help them.
Of course, you can keep friends and family from hitting you up from money by not talking about your unexpected windfall., Your lump sum might not be worth as much as you think.
In particular, you may have to pay taxes on it.
If you won the lottery, for example, then your winnings are taxable.
Other unexpected money won’t be taxable.
For example, you might have already paid taxes on a bonus.
Check your pay stub to see.
Also, some inheritances aren’t taxed.
If you don’t know whether you’ll owe taxes, then meet with an accountant who can advise you.
About the Author
Stephanie Gibson
Brings years of experience writing about practical skills and related subjects.
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