Receiving unexpected money can feel like “free money” that you can spend however you like. Maybe it’s the result of a tax refund, an inheritance, a gift or some other windfall. Regardless, you should think of this as a financial opportunity to build something better for yourself, not an excuse to purchase wants.
Welcome to the latest installment of the CredAbility [now Clearpoint Credit Counseling Solutions] podcast. Along with your host Mechel Glass, here’s Steve Moore with a look at what to do with unexpected money. Steve: Well all of us would like to receive a windfall. Sometimes it happens to us, sometimes it doesn’t. Define that for us, Mechel, what is a windfall? Mechel: Well, a windfall would be a large amount of money that you receive at one particular time. Maybe it’s an insurance settlement or maybe it’s an inheritance that you receive. Steve: All Right, if that happens, what’s the first thing to do? Mechel: Well the first thing you should do is take some time. Don’t go out and spend the money immediately. Take some time to look at your goals of what you have planned for your life in the future. You probably want to park that money in a safe place like a savings account,. Don’t worry about getting a great rate of interest or anything like that. You just want to park the money, save, make sure you understand what the FDC guidelines are for that so you don’t lose it. And take the time to really think about what you want to with your life where you want to go from here. Think about setting aside an amount for an emergency fund. You need to have an emergency fund and if you don’t have that right now, that would be the first thing I would do. Steve: And how big does that fund need to be? Mechel: Well, it depends on how much money they receive. Normally we tell our clients to have at least six months of their living expenses in a savings account so that if there is an emergency at least for six months they have enough time to replace those funds. This person may want to have a year’s worth of their income in a savings account. The next thing that they want to do is look at their debts and pay them off. Pay off any credit card debts you may have, any medicals debts that you may have or student loans. That should be the first thing. Pay off your debts. The next thing is if you have a retirement account, go ahead and fully fund that. If you have a 401(k) or a Roth Account, this time would be the perfect time to fully fund those. And if you have children, you may want to think about setting a college account up for them, a 529 or a ESA account. That would be something that they should also think about doing. Steve: Now when you say fully fund, let me go back a bit. When you say fully fund, what do you mean by that? Mechel: Well there are guidelines for your retirement account. You can’t just stick a million dollars in your 401(k), there are tax consequences. So you have to make sure that you understand how much you can put into your retirement account during the year. Steve: All right, we’re almost out of time. Give us one or two quick tips here at the end. Mechel: The next thing is, don’t forget about the IRS. Steve: Because they won’t forget about you. Mechel: They won’t and they will come looking for you. So if this is money that you need to pay taxes on, it may be a good idea to hire an accountant so that you understand how much money you should set aside for taxes. And finally, do something fun. Go back to that goal list, what are those things that you wanted to do? If it was to take a trip to Hawaii, well this is the time to do that. Steve: Wear your sunblock. Mechel: Absolutely Steve: Thanks, Mechel. Mechel: Thank you.