Coming into a financial windfall can be exciting, but the real impact comes down to the choices you make next — spend impulsively or use the opportunity to strengthen your long-term financial position. This article explores practical strategies to turn unexpected money into lasting security, from clearing bad debt and building an emergency fund to investing for your future self.
Okay, picture this. You’ve just come into a significant amount of money.
This could be a sizeable redundancy package, an inheritance, a bumper tax return, or you may have just won Thursday’s Powerball. I’ll leave that to your imagination.
Now, what would you do with it?
Use your windfall to treat yourself and blow it on something you don’t necessarily need, or would you see it as an opportunity to firm up your financial situation and get ahead?
If you’re in the ‘treat yourself’ camp, don’t feel bad. I’m guessing nine out of 10 people would do the same.
As human beings, we have a tendency to slip into ‘reward’ mode when unexpected money comes into the equation.
Ultimately, it all comes down to whether you’re the type of person who gets swayed by impulsive spending and living in the moment, or whether you’re mentally geared towards squirrelling money aside for the future or, heaven forbid, a rainy day.
Me? You’d expect me to say it given what we do, but I’m firmly in the latter camp.
Don’t get me wrong, I love to treat myself every once in a while, but not at the expense of my family’s financial security.
For me, I see money as a means to an end, which is to achieve financial freedom. In other words, how can I leverage the money we have to make it work for me and my family?
What you should avoid with a financial windfall:
Blowing it on a new car
Cars are expensive items, right?
And they depreciate.
Unless you stand to gain a decent tax advantage out of it, I’d argue blowing a potential windfall solely on a new car isn’t a great idea.
If you don’t have a solid financial base and really need to update your car, possibly consider going second-hand and putting the balance of your windfall into something that’s going to benefit you down the track.
Now, in the interest of full disclosure, we bought a brand-new car a little while back, albeit at a 25 per cent discount. In saying that, we’ve worked really hard at building up a solid financial base over the years and, for me, the discounted price put it in the ballpark of the near-new second-hand models I was looking at anyway. It was a no-brainer.
Blowing it on a big holiday
I live for getting away with my family, particularly getting overseas.
In saying that, though, we’ve got a pretty firm financial strategy and foundation in place, which allows us that luxury a few times a year. If you’re not in the same boat, blowing it on a big trip’s a squandered opportunity, in my mind.
Once you get the foundations right, then knock yourself out with an overseas holiday away once or twice a year.
What you should do with a financial windfall:
Clear bad debt
The very first thing I would do is pay off any bad debt.
I’m talking credit cards, personal loans, hire purchases, store credits and the like.
Boring, I know, but any debt you have that’s not giving you a tax advantage is likely costing you a sizeable chunk of interest each month, particularly if you owe a decent amount of money. If you’re keen on laying the right financial foundations, minimising bad debt’s a must.
Set up an emergency fund
I’ve no doubt touched on this one before, but setting up a ‘rainy day’ fund is critical.
Without getting too philosophical, life has a knack of hitting us with unexpected expenses and situations out of the blue. You just don’t know what’s around the corner.
My approach is simple: we put a percentage of our regular savings aside in a rainy-day fund, purely to cover unexpected bills and emergencies. That way, when we do get hit with something, we don’t feel like our finances are going backwards.
Create a bucket list
Okay, so you’re already squirrelling money away for a rainy day and have virtually no bad debt. Great!
Your first port of call should then be to sit down and work out what you’d like to achieve, financially, over the next five to 10 years, prioritising a list in the process. At a minimum, this will give you a basic roadmap of what you’re working towards.
Fund your future self
I’d then start thinking about what you could do with your potential windfall now to help tick off your financial goals and help fund your future lifestyle, even looking further ahead to retirement.
Pending the time period you’ll need access to the funds, this might be allocating some of the money for investing to help you reach specific goals or bolstering your superannuation.
If you’ve come into a windfall recently and struggling to work out what to do, give me a shout and let’s bounce around some ideas.
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