In many households, nearly every penny is already accounted for even before it’s earned.
The typical household budget that covers the cost of raising a family, making loan payments, and saving for retirement usually doesn’t leave much room for extra spending on daydream items. However, occasionally families may come into an inheritance, you might receive a big bonus at work, or benefit from some other sort of windfall.
If you ever inherit a chunk of money (or large asset) or receive a large payout, it may be tempting to splurge on that red convertible you’ve been drooling over or book that dream trip to Hawaii you’ve always wanted to take. Unfortunately for many, though, newly-found money has the potential to disappear quickly with nothing to show for it, if you don’t have a strategy in place to handle it.
If you do receive some sort of large bonus – congratulations! But take a deep breath and consider these situations first – before you call your travel agent.
Taxes or Other Expenses
If you get a large sum of money unexpectedly, the first thing you might want to do is pull out your bucket list and see what you can check off first. But before you start spending, the reality is you’ll need to put aside some money for taxes. You may want to check with an expert – an accountant or financial advisor may have some ideas on how to reduce your liability as well.
If you suddenly own a new house or car as part of an inheritance, one thing that you may not have considered is how much it will cost to hang on to them. If you want to keep them, you’ll need to cover maintenance, insurance, and you may even need to fulfill loan payments if they aren’t paid off yet.
Pay Down Debt
If you have any debt, you’d have a hard time finding a better place to put your money once you’ve set aside some for taxes or other expenses that might be involved. It may be helpful to target debt in this order:
- Credit card debt: These are often the highest interest rate debt and usually don’t have any tax benefit. Pay these off first.
- Personal loans: Pay these off next. You and your friend/family member will be glad you knocked these out!
- Auto loans: Interest rates on auto loans are lower than credit cards, but cars depreciate rapidly – very rapidly. If you can avoid it, you don’t want to pay interest on a rapidly depreciating asset. Pay off the car as quickly as possible.
- College loans: College loans often have tax-deductible interest but there is no physical asset you can convert to cash – there’s just the loan.
- Home loans: Most home loans are also tax-deductible. Since your home value is likely appreciating over time, you may be better off putting your money elsewhere rather than paying off the home loan early.
Fund Your Emergency Account
Before you buy that red convertible, put aside some money for a rainy day. This could be liquid funds – like a separate savings account.
Save for Retirement
Once the taxes are covered, you’ve paid down your debt, and funded your emergency account, now is the time to put some money away towards retirement. Work with your financial professional to help create the best strategy for you and your family.
Fund That College Fund
If you have kids and haven’t had a chance to save all you’d like towards their education, setting aside some money for this comes next. Again, your financial professional can recommend the best strategy for this scenario.
NOW you’re ready to go bury your toes in the sand and enjoy some new experiences! Maybe you and the family have always wanted to visit a themed resort park or vacation on a tropical island. If you’ve taken care of business responsibly with the items above and still have some cash left over – go ahead! Treat yourself!
World Financial Group, Inc., its affiliated companies and its independent associates do not offer tax and legal advice. Please consult with your personal tax and/or legal professional for further guidance.