It feels good to receive a financial windfall. That unexpected money and a huge one at that can really help you improve your financial position. It gives you an exhilarating sense of financial stability – but only if you know how to react to it properly. There are smart ways to spend your extra funds but unfortunately, not everyone follows that path.
Think about the lotto winners for a moment. You would think that after winning a huge amount of money, they would be sitting pretty and living a great life until they die. Unfortunately, that is the wrong assumption. While some of them have improved their lives, not everyone was smart enough to make the right decisions about their money. In fact, some of them ended up in a worse financial situation.
According to an article published back in 2006, there is a dark side to financial windfalls. This is especially true if it involves an inheritance. The article revealed how windfall profit from the passing of a loved one is tied to emotions. Greed, envy, pride, and misunderstanding – these are all issues that can arise from a monetary inheritance. It can ruin relationships and destroy lives. This is why you need to be very careful with the way you react to windfall money. It does not matter if it came from a bonus, inheritance, prize money. You need to know what to do with this money.
Best practices after receiving some windfall money
There is actually great potential when you receive windfall profit. It can really improve your life for the better. However, that would also mean you need to know what to do after receiving that money.
According to reports, 7 out of 10 people who find themselves with sudden wealth become broke within a span of a few years. Instead of feeling happy about the financial windfall, they end up regretting ever getting it.
While the statistics may seem disheartening, that does not mean it should feel scared. This is still a blessing that can work in your favor. Just make sure that you react to it appropriately.
Here are some tips on what you should do after receiving a financial windfall.
Practice the “pause”
It is exciting to find out that you got an unexpectedly huge amount of money. But while you are feeling an exhilarating high, you need to force yourself to pause for awhile and think. It is very important for you to avoid making rash decisions. You need to understand that this “blessing” can still end up destroying your financial stability. So pause for a moment and consider this change in your finances and how you want it to change your life. If possible, just stash that money in an account and leave it untouched for as long as possible – even a few months if you can.
Consider your long-term plans
The financial windfall that you received is a great opportunity for you to take action on your long-term goals. Your financial decisions today can affect your future. So if you can use this unexpected money to improve your financial position, your future will definitely be given a boost. You can invest that money and add it to your retirement fund. Look into your list of long-term goals and see which of them can benefit from this money.
Organize your finances
It helps to look into your finances to see which area that needs help the most. Maybe this money should not go into your savings but your debt payments. It all depends on where you can save the most. Organizing your finances will give you insight on what currently happens to your money. This means looking at your bank statements, monthly bills, loan documents, and other financial paperwork. There may be a priority issue that can be solved by the financial windfall.
Identify priority problems
If you have high-interest rate debts, you might want to use the windfall money to pay it off. You are wasting a lot of money by paying these interest rates. If you can get rid of it, there will be a lot of room in your budget to help you improve it. But then again, if it is more important that you put more money into your retirement fund, then you should use your money there.
Avoid being too generous
It seems like a good idea to be generous when you come upon some financial windfall. While it is okay to treat your friends, do not go overboard. You need to leave a huge chunk of the money to improve your life and personal finances. You can give to charity – but again, make sure it is a reasonable amount.
Protect your money
Finally, you also have to make sure that your money is protected – especially if you got a really huge amount. If you have an online banking account, it might become a target for fraudsters. Sometimes, lottery winning or inheritances can be researched. You might become a target – so just make sure you are careful with all your personal and financial records.
Consider all of these when you get a financial windfall. As exciting as it might be, these tips will help you react to it proactively. If you commit to making smart choices, you will end up with a better financial position because of this windfall money.
Of course, the chances that you will get a huge inheritance or win the lottery is probably very slim. But there is one type of windfall money that you are most likely going to enjoy – a salary raise. At least, it should be considered a one because you were able to survive on a lower income.
Smart ways to use your money after a raise
According to statistics, we will see an average of 3% growth in the salary increase budgets of US employers this 2018. Your chances of getting a raise this year are quite high. You want to make sure that you can take advantage of that.
When you get a raise, you should not be too quick to upgrade your lifestyle. If you jump that upgrade, the salary increase that you got will cease to feel like a bonus.
Here are some of the things that you might want to do to take advantage of.
Give your retirement fund a boost
Start by investing in your future. Instead of using the raise to increase your lifestyle expenses, you should just maximize your retirement contributions. The more you invest and the earlier you do it, the higher the investment growth. If your employer matches your contributions, that will make the growth even better.
Increase your emergency fund
Another thing that you can do is to increase your emergency fund. Your reserve fund is important because it will help you get out of tough financial situations. A trip to the ER, car troubles, job loss – all of these will require you to spend money in order to recover. You may want to put more money into this fund so your financial security will not be compromised – regardless of the emergency that you will face. Instead of buying a bigger house or a second car, it is better for you to just put your raise into your savings.
Pay off your debts
Sometimes, your debt can really compromise your finances. So if you get a raise, use it to pay off your debts. This will help you get out of debt a lot faster. It will also keep you from wasting money because of the interest rates.
Add more saving goals
Instead of planning how to spend the extra money you will be earning each month, why not use it to fund new saving goals? Start a college fund for your kids. You can also use it to fund an annual vacation. You know that these savings will be enjoyed in the future so that is definitely a good way to use your raise.