Did you just come into some extra money? In this article I share with you exactly how I make decisions about lump sums of money.

I have kept an ongoing list of how to manage unexpected incoming money since my 20's.

Nerdy? Yes. Effective? Yes.

Let's dive right into how to make a decision you won't regret.

what to do with a lump sum of money

First: Manage Your Emotions

Before we ever talk money let's talk emotions. Money is often more about habits, beliefs and values than actual math.

And add to that the high 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?

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.

"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.

"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 money you receive, you might wait a couple days or a few weeks.

Exceptions to Waiting

When shouldn't you wait? When you at risk of bankruptcy, foreclosure or eviction, or have past due bills. If this is the case, take enough of the money to catch up. Then let the remainder wait till you process the emotions.

If this is the case, and the money came from a source that requires grieving, consider having a friend or advisor help you pay your creditors. Especially if you need to negotiate payoff details.

You may also not be able to wait, if this is from the death of a spouse and you need the money to live. In this case work with a trusted adviser to set up a stable way to take money out and have it last.

How to Allocate The Lump Sum of Money

What to Do With Money While Waiting

While you are waiting to spend and invest the money put the money in a 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 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.

Steps to Decide Where To Spend Money

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.

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 $1,000 since you won't know exacts until it is fully planned.

Step 3: Prioritize the List

Now is the time to start sorting through everything you wrote down. Begin by putting them in order of your desire to do that. For example, if you have listed: fund emergency fund, go on vacation, and payoff car. Put those in order with number one being the most important. You may end up with vacation, payoff car and then emergency fund. Remember this is what how you value what you want. Not anyone else. If you best friend would do the car first, but you really need a vacation then don't switch it for the friend.

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!

Ideas for Your Lump Sum

  • College savings for kids
  • Retirement investing
  • House down payment
  • Pay off Debt
  • Vacation
  • Fund emergency fund
  • Repairs to house
  • Pay off car
  • Get a new car
  • 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.

    When would you want to consider something outside of your traditional investments? If the lump sum of money was very large, then you may be able to fund your retirement with Index funds. Then take anything left and do something different. But, before you jump into anything you don't understand please do your own research. 

    Don't take blind advice from a cousin five times removed who just happened to show up. Take your time and do your due diligence.

    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 get started. 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.

    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

    • Watch out for scammers. Especially if you received the money in a public way, such as the lottery. Sadly many will try and swindle you. Don't take unsolicited calls.
    • Don't rush. There is no reason to rush into any decisions. It is better to have the money sitting in savings and make a good decision. Then to rush into a bad one.
    • Avoid high pressure sales tactics. If you are looking for an advisor to help, a high quality one will not push you to decide quickly.
    • Avoid guaranteed profits. There are no guaranteed profits, unless you are talking to an insurance person about an annuity. And then be careful, because you are trading guarantees for decreased return and increased fees.
    • Bonus tip: keep your list up to date and the next time you get extra money you are ready to go. I keep my list in Notion, but in the past have used excel and Evernote.

    Have fun using your lump sum payment!

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