Did you just come into a financial windfall? Getting a lot of money at one time can be overwhelming. You don’t want to make the wrong decision. So, indecision moves in and the money just sits!
Let’s get you to a place where you can make the smartest decision with your lump sum of money.
I am going to share with you exactly how I make my own decisions about lump sums of unexpected money.
Let's get started by talking about your emotions.
Manage Your Emotions
Before we ever talk about money let's talk about your emotions. I know this isn’t as fun as thinking about all the way you will spend the money. But it is the critical step in helping you make smart financial decisions.
Money is often more about habits, beliefs and values than actual math.
And add to that the elevated emotions that come with unexpected money - you could create a recipe for disaster. Even if it came from a good source, your emotions will be in high gear for a while.
So, the best thing you can do first with the money?
Wait.
Yup you read that right. Do not rush into any decisions until you have taken the time to allow your emotions to calm down.
How long to wait? That depends on how you got your financial windfall. A “good” circumstance vs “bad” circumstance.
"Good" Sources of Money
If the money came from a positive experience, such as a bonus from work or the lottery, then the wait time you need is less. You are looking to allow the excitement to wear off. This will allow your rational mind to work better. Depending on how much you might wait a couple days or a few weeks.
"Bad" Sources of Money
If the money came from an inheritance, it is best to wait at least 6 months. You want to finish the grieving process before you spend the money. When we lose a loved one, we are not thinking straight. This loss triggers a flood of altered chemicals in your body. It impacts sleep, mood, anxiety and more.
Focus on emotional healing, and then allocate the money.
Side note, other life events can trigger this grief process. And those may come with money. For example, divorce. If you are not feeling yourself, then wait. Better to sit on the money until you are ready then to make bad decisions.
Exceptions to Waiting
When shouldn't you wait? When you are at risk of bankruptcy, foreclosure or eviction. Or you have past due bills. If this is the case, take enough of the money to catch you up. Then let the remainder wait till you process the emotions.
If this is the case, and the money came from a loved one, consider having a friend or advisor help you pay your creditors. Especially if you need to negotiate payoff details.
You may also need the money right away if it is a spouse that passed, and you still need to pay regular bills. In this case work with a trusted adviser to set up a stable way to take money out and have it last.
What to Do with Lump Sum While Waiting
While you are waiting to spend and invest the money put the money in an FDIC insured basic savings account. Do not put it in a checking that you can easily spend it without a plan.
If you are waiting longer than six months, you may want to consider putting the money in a Certificate of Deposit (CD). This will earn you a bit more interest.
The most important thing is to not put it somewhere you could lose the money before planning out what you want. Don't get pressured into more than a savings account or a CD.
How much interest you earn on the money isn’t the first concern. Having a plan is, then you can worry about return!
Steps to Decide Where To Spend Lump Sum
Step 1: Create a List
List out everything that you want to do with the money. This is not about filtering out ideas. This is a brainstorming process. Put everything that comes to mind, no matter how crazy or big it is. Don’t stop until you can’t think of anything else. You may want to do this over a few days so you give yourself time to dream!
Step 2: Add costs to List
Now go through and estimate what each item would cost you. Be as detailed as possible. If you want a treadmill, then research which one you like best. Use that specific one as the cost. If you are unsure, you can use an estimate. For example, if vacation is on the list, you might estimate $5,000 since you won't know the exact amounts until it is fully planned.
Step 3: Prioritize the List
Now is the time to start putting your ideas in the order you want to do them. If you are struggling between want to and need to, it is helpful to outline your values and long-term goals. This will help you make smarter decisions based on your goals and not in the moment wants. Remember this is what you want. Not anyone else. If you need help with life planning for goals, learn more here.
Step 4: Allocate the Money
Time to start going down the list and spending the money. Begin with the first item that you have listed as a priority. Continue down the list until you have allocated all the money. You may find as you do this step, you end up re-prioritizing things. This is okay - it is your list! You also don’t have to rush this. If you need more time – take it!
Ideas for Your Lump Sum
Stuck and can't come up with ideas? Here are some to help you get your list started.
What to Do for Investments
If you have decided to use some of your money for investments. I recommend you don't try anything fancy. Stick to what you know. Now is not the time to go big and take on riskier investments. Especially if it is for kids' college or retirement. Consult your advisor to help you allocate everything out or stick with Index Funds.
When would you want to consider something outside of your traditional investments? If the lump sum of money was large enough that your emergency fund is full, debt is paid off, retirement is funded. Then you may want to take anything left and do something different. But before you jump into anything you don't understand please do your own research. Take time to learn about what you want to invest in. Lump sums bring out the scammers and cons. So don't rush it!
Don't take blind advice from your cousin five times removed who just happened to show up. Take your time and do your due diligence.
Learn more about retirement investing for women
All at Once or Dollar Cost Average?
If you have the money in your account, it is better to invest it all at once. Most studies show it is better to get in the market and allow the compounding to start working its magic. When is this not the best approach? If you know the market is going down soon. But the tricky part of this is you just moved into market timing. And in general, most of us are not good at this. In fact we are downright bad.
So, if you are investing for the long term, then get in the market and let the money do its work!
Things to Keep in Mind
Have fun using your lump sum payment!
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