We all remember as kids how excited we were to find a dollar on the sidewalk. Before the money found its way into our pocket, most of us were likely spending it in our heads on the latest toy, or looking forward to the next trip to the store to get some candy. Very few of us considered saving our new-found treasure.
Not surprisingly, a lot of us operate in much the same way today as adults. Whether it is a tax refund, an unexpected inheritance, or we’ve recently refinanced a home, most of us look at an unexpected financial windfall as a way to gratify our near-term wants.
Instead, it might be wise to consider the long term.
Are you in debt? Take a look at your debts and see what you can pay off. You may want to consider making a sizeable payment on that nagging credit card that charges double-digit interest every month, or even pay it off.
Are you saving enough for retirement? It’s really easy to spend the money today on something fun. However, years down the road you will be retired and may very well need the cash. The truth is most of us underestimate how much it will take for us to retire. While contributions to employer-sponsored retirement plans allow us to save a lot, often they are not enough. With your windfall, you can set up an Individual Retirement Account, which will enable you to save more than you could with your employer’s plan alone.
What about your heirs? You may also want to think about setting aside some of the money for your heirs or dependents. Funding a Coverdell Education Savings Account or a 529 plan for your children or grandchildren are options. The government even provides you with several tax incentives to do so.
An unexpected financial windfall can be as much fun as finding that dollar on the sidewalk years ago. However, the decisions that are associated with it now are a little more complex. You may wish to consult with your tax advisor and your financial advisor to explore your options further.