Sometimes life can surprise you with unexpected cash. It might be a competition prize, a Lotto win, a tax refund or an inheritance, it all has the potential to make a real and potentially lasting difference to your life. But how?
Here are a few different approaches you could try to make the most of your windfall.
1. Stop and take a breath
One of the best things you can do is nothing at all, while you wait for the news to sink in. The larger the sum, the more this is true. And by doing nothing, we mean put the money in a savings account while you think about what to do with it. Don’t leave it in your current account or you may find you accidentally spend it bit by bit, with nothing much to show for it.
Media stories are fairly common about big lottery winners who fritter away their winnings and end up no better off than they were before they won big. This is because they get carried away with buying things and don’t plan for the long term.
So, before you hit the shops, stop and think about what it is you really need and want. There’s no rush - nobody’s going to take the money away if you don’t spend it right away.
2. Pay off your debts
OK, we’re wearing our “responsible” hat for this one. But paying off debts is one of the best ways to improve your financial wellbeing. This is particularly true if you have high-interest debt, such as credit card or store card debt.
If you have a small windfall that won’t cover all your debt, paying off the debts with the highest interest rate first is probably one of the most useful things you can do with your money. It’s more likely to improve your overall financial position than earning lower interest rates on a savings account for example.
When you’ve paid off the debt, you should find you have more disposable income, which you can then direct to your savings if you want to.
3. Save some for a rainy day
Do you have an emergency fund for unexpected expenses, such as your car breaking down or the fridge giving up the ghost? If not, it’s a really good idea to set aside a stash of cash you can call on in an emergency. How much you need in an emergency fund is different for everyone, but a good general guide is enough to cover three to six months' living expenses.
Once you have your stash set up in a dedicated savings account, set up a direct debit from your current account for a modest amount each month so your emergency fund is always replenishing itself.
4. If you splurge, go 50/50
Time to lighten up. Is there something you’ve always wanted that you want to treat yourself to, now you have the means to buy it. Fair enough. But so your boom isn’t followed by a bust, think about dividing your windfall in two - half to spend now, half to put towards paying off your debts or saving for a rainy day.
You will feel better if you can look your finances in the eye and say they’re in better shape since you received your windfall.
Remember this can be more than just a chance to spend up large - it can also be an opportunity to change your fortune for the better.