5 Financial Strategies for Unexpected Money

Receiving an unexpected sum of money can be a welcome surprise, but deciding what to do with it can be a challenge. Should you save the money or pay down debt? Invest the funds or donate to charity?

While rushing to book a vacation with proceeds from a windfall may be tempting, it might be more rewarding to use the funds to shore up your finances for the long run. Here are five strategies to consider:

Grow your emergency fund

A robust emergency fund provides security for financial emergencies. Having a strong emergency fund is great, but adding extra money can further enhance your readiness for unexpected expenses. This is especially important in an unstable economy. Adding to your savings can provide additional security and peace of mind.

One way to increase your savings is by putting a large sum of money into a retirement account with tax benefits. If you have a 401(k) from work, you can't put all your money in at once. But you can start a traditional or Roth IRA and put your extra money in there instead. The 2024 contribution limit for either type of IRA is $7,000 for people younger than 50 and $7,500 for those older than 50.

Invest for the future 

If you have already invested the most you can in tax-advantaged accounts, consider using a taxable brokerage account. This can help you grow a large amount of money over time. It's a good way to build long-term wealth. A financial advisor can help determine how to invest to complement your tax-deferred portfolio to help you achieve long-term financial goals. 

Prepay your mortgage. 

A windfall can make a big impact on your mortgage, depending on how much you owe. Before making a decision, ask your lender to use the windfall to pay off your loan principal. This will help lower your long-term interest payments. 

Before paying off debt early, consider opportunity cost. Opportunity cost is the idea that money used for one purpose cannot be used for another. Paying off debt is a good idea if the interest you're paying is higher than what you're earning from your investments.

This way, you can save money on interest payments. It can also help improve your financial situation in the long run. Consider evaluating your debts and investments to see if this strategy makes sense for you.

Donate to charity

One easy way to make a positive impact on your community is by supporting causes you care about. This helps align your beliefs with your actions.

By supporting causes you care about, you can make a difference in your community. It can also help you reduce your tax bill. In most cases, you can deduct up to 60% of cash contributions to public charities, including donor-advised funds.

Choosing the best option for you

The best use of a windfall depends on your individual circumstances. If you’ve already maxed out your retirement accounts, paying down your mortgages or donating to charity to reduce taxable income may be a better fit. You can also split a windfall among several options to maximize your advantages. 

Additionally, before you spend any of your windfall, you’ll need to determine if you owe taxes on it. Cash gifts under $18,000 from individuals are usually not taxed. However, other lump sums such as work bonuses or lottery winnings are considered income and will be taxed accordingly. 

Bottom Line

Determining the best use of a windfall can be challenging, especially if you feel pulled in multiple directions. Work with your financial advisor to figure out the best course of action as part of a long-term wealth management plan.

Sources:
https://oechsli.com/my-account/us/library/91053/

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.