$200,000 Windfall! Now What?

Jun 2, 2015 by

$100 billsLet’s imagine this happy scenario: $200,000 you weren’t expecting is suddenly yours, in a big, fat lump. Maybe your late Uncle Fred was a bit better off and liked you more than you knew. Perhaps that weekly lottery investment finally paid off. Or maybe a wildcatter discovered oil under that formerly worthless acreage you own in North Dakota.

Your first thought on learning the fantastic news might have been something akin to “I’m going to Disney World!!”

A few days later, after the rush of shock and excitement wore off, you may have begun thinking more seriously: Just what should I, or we, do with this cash?

Take Your Time in Considering What to Do With a Windfall

First, take your time! Unless some guy in a striped suit has been threatening to break your face over a financial misunderstanding, put your loot in a FDIC-insured bank account and breathe deeply for a few weeks while you give the matter sober thought.

Before You Spend or Invest a Windfall, Take Stock of Your Situation

The best use of a windfall will be different for each of us. I might have a few thousand dollars outstanding in payday loans with 600% APRs and $40,000 in credit card debt at 29%, and you might be debt-free but living sheepishly in your in-law’s basement because you told your boss to go eff himself (which I respect, if he deserved it!).

You’ll probably think of fifty+ uses for that $200k over the course of the week after you get the news. How do you sort these options? What’s most important? How can you get the biggest bang for your windfall buck? And how do you avoid squandering your windfall, like so many seem to do?

First, take stock of your situation. Write down some “big picture” parameters that bracket your finances. Think about:

  • When would you like to retire?
  • How big is your nest egg today, and how big does it need to be before you can retire? Ballpark numbers are okay.
  • How much debt do you have, both high-interest and low-interest?
  • How’s your health, and how are your health genes?
  • Do you have enough savings outside of retirement accounts to pay your bills for several months if your household’s income were interrupted or slashed? Is the car replacement fund stocked?

Priorities for Your $200,000 Windfall

Now you’ve done a calm, levelheaded ‘big picture’ assessment of your financial situation. You have clear in your mind your goals and whether you’re on track to reach them. I can’t include here every conceivable set of facts, but barring unusual circumstances, most lucky windfall recipients should think about these priorities:

1. Stock a Generous Emergency Fund

If you have no emergency fund, stock one with cash from your windfall. Or top up your E-fund if it’s smaller than it should be. (See “How Much Emergency Savings?“)

2. Pay Off High-Interest Debt

If you have any debt with an APR over 5%, use your windfall to pay it off. Let’s say you owe $30,000 at an APR of 19%. That’s costing you nearly $6,000 a year—$500 per month—in totally wasted interest expense. Here’s your chance to end the madness, literally overnight, and parlay your $200k into much more cash!

3. Pay Off Debts In Collections

If you have overdue debts, pay them off. Cleaning up your credit report will pay big dividends. (Read “Raise Your Credit Score the Right Way” to learn more.)

4. Celebrate a Little!

Once you’ve handled priorities #1, 2, and 3, have some fun! Toast your Uncle Fred while lounging on a Caribbean beach with your significant other, and get that big screen TV before the NFL season begins.

5. Build Retirement Savings

After taking stock, you recognized that you want to retire in 15 years, but your 401(k) balance hasn’t yet broken the six-figure barrier. Your windfall just may be at least a part of that ‘magic wand’ you evidently were counting on to help you meet your retirement aims. Open a Roth IRA, and deposit the maximum. Save the rest in a non-tax advantaged account targeted for your retirement.

6. Fund Planned Savings Accounts

Is your car on its last legs, but you’ve got no savings except your emergency fund? Are you planning to put the cost of year-end holidays on a credit card again? Is the roof leaking? Set aside part of your windfall for anything and everything for which you’d otherwise have to pay with borrowed money.

7. Pay Down the Mortgage

I’m a big advocate of investing in your mortgage. Read “Mortgage Payment as Investment” to learn what I mean.

8. Give the Kids a Gift

Once your retirement security is assured, share your good fortune with your kids. Instead of giving them cash (which might be exchanged for Apple Watches, Aquavit, or a barely remembered weekend marathon in Vegas), pay down their student loans or underwrite a family reunion.

9. Celebrate a Little More!

Still have some of your windfall left? I’ve heard Uruguay is nice.

10. Taxes

If you will owe tax on your windfall, set aside enough to cover Uncle Sam’s piece of the pie, which will be due next April.

What Would You Do With a Windfall?

What would you do with a $200,000 windfall? It’s not enough to change your life, but $200k can sure make up for a few past sins and misfortunes!

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  • EL

    I think the tips you outline are on point and should be considered before spending a windfall. I like the point of waiting a while after clearing the check as a smart financial tactic. Investing would be my first reaction, and then planning a small vacation is the second.

    • I agree. Investing a windfall to parlay it over time into an even larger sum makes a lot of sense. As does a small vacation!

  • squirrelers

    I’d make sure that $200k never saw the light of day, and spent it’s time compounding for many years!

    • You’re more disciplined and responsible than me! 🙂

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