Got a Cash Windfall? Do These 5 Things First

Before you join that caviar-of-the-month club, it’s important that you nail these finance basics first.

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Whether you’re the lucky recipient of a work bonus (couple thou!) or the winner of a huge lotto prize (couple mil!), getting a windfall is exciting. But a coming into "Princess Diaries"-level money is a big responsibility, too -- especially if you want to maximize its benefit and keep the money working for you.

So before you go out and join that caviar-of-the-month club, it’s important that you nail these personal finance basics first.

If it’s a really big windfall: Tell your lawyer, not your friends

If the amount you’ve come into is truly life-changing, brace yourself: You’ll probably have lots of friends and family coming to you asking for a handout. That’s why we recommend you keep quiet about monstrously huge windfalls, at least at first. Eventually, you can make like Britney Spears and show off your money in a video with Iggy Azalea. But don’t hire that camera crew just yet.

If you’re looking at serious money -- as in, flip off your boss, quit your job, build your own cult compound -- start by talking to a lawyer. They’ll help you protect your money and handle the influx of requests. You don’t want to be the one saying “no” -- you’re now rich enough to pay someone to say “no” for you.

Start an emergency fund

OK, so, maybe the amount of your windfall is a little smaller -- say, in the four-figure range.

If you don’t have a chunk of cash set aside in a savings or money market account for emergencies, that should be your first priority, NOT a cash-money gun. 

How much should you have squirreled away? Investment company Vanguard and finance expert Dave Ramsey both recommend you save 3 to 6 months’ worth of your expenses. But that might not be enough -- Suzie Orman recommends you save at least 8 to 12 months’ worth. “You need to know that you are going to be secure,” she told CNBC.

It’s a mistake to put this money in a checking account or in the stock market, though. Put it in a low-yield checking account and inflation will eat away at your nest egg, causing your hard earned scratch to shrink in purchasing power over time. Putting this emergency money in the stock market is dangerous; sharp market declines can come right when you’ll need money the most.

The best place to put your emergency stash is in a safe, high-yield checking account that can be easily accessed at any time. We recommend seeking out a savings rate of 1.25 percent or higher -- slightly less than the rate of inflation, but still more than you can expect out of your local savings and loan. It’s definitely worth shopping around for the best rate. 

Pay off your high-interest debts

Credit cards are convenient, but they’re also expensive to use. It’s not uncommon for banks to charge an interest rate of 20 percent or more, a high-enough rate to keep some unlucky people in debt permanently.

As tempting as those low monthly payments might be, we strongly recommend using your newly found windfall to crush this debt before it crushes you. Then cut up those cards for good. Or light them on fire, whatever.

Invest in your retirement

Want to stretch your windfall and make it go even further? Consider socking away some of your new found cash into a tax-deductible individual retirement account (IRA). In addition to scoring a tax break for 2017, your money will continue to grow through the next several decades.

So long as your modified adjusted gross income falls below a certain threshold ($118,000 for single filers in 2017; $186,000 for joint filers), you can put up to $5,500 per year in a traditional IRA and deduct that amount from your income at tax time. You should also consider increasing your 401(k) contribution to the $18,000-per-year maximum, too, if your employer offers one -- especially if they offer a match.

Save money for a long-term goal

Once you’ve got an emergency fund set up and you’ve maxed out your retirement accounts, it’s time to save money for other long-term goals such as buying a house, flying to Disney World, or starting a college fund for your kids.

If your goal is longer than ten years away, consider investing your money in a S&P 500 stock market index fund with a low management fee. Otherwise, you might want to save in a high-yield savings account to protect against a market downturns. Again, be sure to shop around for the best rate.