It is always tempting to splurge with “extra” money. However, if you receive unexpected cash from a tax refund, inheritance, gift, or bonus at work, it pays to be patient. Vow to avoid running out and spending money on frivolous items and take some time before making any spending decisions.
Following are some ideas of how to spend a windfall wisely.
Prepare for tax season. Check with a tax advisor about whether or not your financial gain will be considered as taxable income. For example, if you took an itemized deduction for state or local taxes on your Federal return, you may have to include all or part of the refund in your income on your tax return.
Pay down debt. If you pay the minimum monthly payment of 4 percent on a $6,000 credit card debt with an 18 percent interest rate, it would take more than 13 years to repay. In that time, you would pay $3,515.68 in interest charges. Accelerating your debt payments is an easy financial decision.
Save for emergencies. Americans are currently saving less than one percent of their disposable income. That means that any unplanned expense could turn into a financial emergency. Placing your windfall money in a savings account could be the difference between a financial difficulty and a financial disaster.
Prepare for the holidays. Too many people get in over their heads during the holidays and being in debt is no way to begin a new year. By saving your boon for holiday purchases, you can take advantage of lower prices and avoid post-holiday debt.
Grow your money. The eighth wonder of the world is compound interest. Depositing $6,000 into a savings vehicle that earns 8 percent interest can really add up. After 5 years, your $6,000 will be worth $8,939.07. After 10 years, it will be worth $13,317.84
Invest in yourself. You are your most important and valuable asset. Use the newly acquired money to further your education or enhance a skill.
Give to others. If debts are under control and your savings are adequate, consider making a donation to a favorite charity. Not only is it a good thing to do—it’s a tax write off.
Finally, take the time to revisit your overall financial plan. Having a solid plan will take the guesswork out of future financial decisions. Your plan should include both debt repayment and savings—perhaps a windfall is all you need to raise the bar on your financial goals.
The folks at Money Management International exist to educate and inform consumers about their financial choices. We are not accountants, and cannot answer tax-related questions. For tax information, visit www.irs.gov.