| May 21, 2012

Managing a cash windfall wisely

When individuals come into a large cash windfall, whether it be a work bonus, tax refund, lottery win or inheritance, the impulse to spend tends to creep up quickly. However, consumers who are trying to put themselves in a better financial position should explore the ways in which their windfall can help them further their goals, before they decide to spend it on a new electronics or a vacation. There are several ways individuals can maximize all or part of their cash bonus and examining their financial position is the first step.

First, consumers should consider the type of debt they currently hold. Debt can be toxic if the amounts are too high, and a cash windfall may help chip away at or eliminate credit card debt, personal loans or the remaining balance of an auto loan. If individuals plan to use a portion or all of their income to pay down credit card balances, they can maximize their payments by paying down the card with the highest rate first to cut down on the interest charges.

Another option consumers have to improve their financial standing is using the windfall to start an emergency fund. A small cash cushion can help adults overcome a sudden expense, such as a medical bill, job loss or auto repair, when they cannot afford to cover these costs out of pocket. Without a cash cushion, consumers are often forced to drain their savings accounts, retirement funds or turn to credit card spending to meet their needs. Most financial professionals encourage individuals to put away enough money to cover three to six months' worth of expenses. However, some more conservative experts say having enough money to pay for living costs for a nine to 12-month period is preferable. Even if the windfall is not sufficient to build a large emergency fund, starting a small cash cushion to add to can still be beneficial.

Adults who are behind on their retirement savings have the option of growing their nest egg by making additional contributions with their windfall. Individuals can begin individual retirement accounts with a bank, open a certificate of deposit, invest in the market or purchase an annuity.

Lastly, consumers may choose to use the money to accomplish a financial goal. For example, individuals may want to put a down payment on a new home or start a college fund for their children. The way in which adults choose to use their windfall is entirely up to them, but considering their current financial position and future goals may influence their decisions. 

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