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By Brenda

The Best Way to Manage an Unexpected Lump Sum of Money

Sep 22 2017 Parent Category I

When you have debts, and are living paycheck to paycheck, it can be easy to get sucked into the dream of what it would be like win the lottery (or otherwise come in to a large sum of money. In these dreams, you may imagine yourself doing extravagant things such as taking a trip around the world, buying an expensive sports car or living in a luxurious home. While it seems like nothing more than a wonderful dream, some people do come into an unexpected lump sum of money (also known as a windfall). This windfall can come from the lottery or can also come from an inheritance, a life insurance payout or a legal settlement. No matter which way you come into your windfall, receiving a large amount of money suddenly can seem daunting. You may not know what to do with it. This can lead to some problems, including sending yourself deeper into debt than you were before you got the money. Here are some ways in which you can manage an unexpected lump sum of money that can help you now and in the long run.

 

Wait a Bit Before Spending Any

It can be extremely tempting to spend any money you get as soon as the check is deposited into your bank account. Your mind may spin with possibilities, both frivolous and practical. You can pay off your debts, upgrade your home, buy a new car or take that vacation you never thought you’d be able to afford. Before you start swiping your card or writing checks, wait. It can be extremely beneficial for you to take some time (for some, this means waiting up to 6 months or more) to let things really sink in and evaluate your situation before you make any decisions on what to do with your newly acquired money.

 

Consider Taxes

Some unexpected lump sums of money (insurance payouts for example) are not taxed. Many other sources of windfalls, however, are subject to taxes. It is therefore important to keep this in mind before you begin spending. Even somewhat modest windfalls can bump you up into a higher tax bracket. Consider consulting a tax professional for help on how much you might expect to pay the IRS.

 

Pay Off Some Debt

If you have a significant amount of debt, consider paying some of it off. Paying off credit card debts can be extremely helpful by not only eliminating monthly payments, but by saving you potentially hundreds every year by eliminating the interest you pay on your revolving debts. Consider starting with your highest interest debts (such as high interest credit cards) first and working your way down.

 

Set Up an Emergency Fund

How often have you been left in a bind or had to pull out your credit card when an emergency (such as a medical emergency, a broken appliance or an issue with your car) arose? Having an emergency fund set up in the event of such emergencies can be a great asset in preventing financial turmoil. When you live paycheck to paycheck, however, setting aside even a small amount each month can seem like an impossible task. Using some of your unexpected lump sum to set up such an emergency fund can help to put your mind at ease and allow you to more easily handle an issue should it arise.

 

Save for Retirement

In the event that you come into a large sum of money, resist the urge to quit your day job. Quitting your job means that you stop earning money that contributes to your Social Security benefits. You may also realize that you suddenly don’t have any money left. Use some of the windfall money to save for retirement by setting up an IRA instead.

 

Be Wary of Sudden Visits from Friends and Family

It’s amazing how many friends and family members suddenly come out of the woodwork when word gets out that you came into a sizeable amount of money. These are people you may speak to very little, or you may not have spoken to in years. They may come to you with sad stories about how they are down on their luck and could really use some help. It can be difficult to tell people “no,” but if you start handing out money like it’s no big deal you may quickly find that you have nothing left to help you out of your current situation.

 

Don’t Forget to Treat Yourself

Being responsible with your windfall is important for long-term success. That doesn’t mean you can’t enjoy your unexpected money. When you sit down to make your plan, don’t forget to earmark some of your money for something fun. Just stay within reasonable boundaries. Decide upon a specific amount (such as 5% or 10% of your total sum) and don’t exceed that amount. This way, you can be responsible and you can still have a little bit of fun that you’ve always wanted to have.

 

Falling into an unexpected lump sum of money may seem like nothing more than a far-off daydream but it does happen. If it does happen to you, it’s important not to react carelessly and squander it all right away. Taking the time to assess your financial situation and consider the best ways to use (and save) your windfall can help to change your situation and set you up for long-term success.

 

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