For years, my aunt and uncle helped their aging relative, Dottie. They didn’t receive any financial assistance for the five to ten hours a week they spent maintaining Dottie’s lawn, cooking her meals, and driving her to doctor’s appointments. They put in that time, week after week, because they loved her and wanted to make the remainder of her life more comfortable. However, my aunt and uncle were in for a surprise when Dottie passed away. They discovered not only that Dottie had a small fortune, but that she had left all of her money to them. My aunt and uncle raised a large family and had always lived on a bare-bones budget, yet suddenly, they had inherited a sudden large sum of money.

My aunt and uncle’s situation was not unique. Many people fall into a large sum of money through inheritances, insurance settlements, gambling, or other ways. If this happens to you, what should you do with the money?

Do Nothing for a Few Months

The best thing to do is nothing. Yes, you heard me. Take the money you received, put it in a bank account, and do nothing with it for a few months to a year. Take time to get over the shock of your good fortune. Take time to plan out how best to use the money.

If you don’t take the time to let the money sit, you may blow it on all of the things you’ve always wanted but could never afford—a new boat, a vacation home in the mountains, nights out at fancy restaurants, etc. Take the time to get used to having so much money before you do anything with it.

Consult with a Financial Advisor

You may also want to consult a financial advisor and see what she recommends you do with the money. However, choose carefully. Some financial advisors are paid based on the products that they sell you, so they may push products that aren’t the best use of your money so they can also benefit from your windfall.

What to Do with a Sudden Large Sum of Money

After you’ve taken a few months to set the money aside and get used to the idea of having a fatter bottom line, you are ready to decide what to do with the money.

Set Aside a Portion to Spend

If you receive a large amount of money, the first thing most people want to do is spend it. Go ahead and spend some of it, but first, decide what amount you will use frivolously. Maybe you decide on 5% of the money.

Take that 5% and have no guilt buying what you want. Whether that is expensive meals out, or a vacation, or a new car, enjoy the money guilt-free. But, stop spending after that and make wise choices with the remaining funds.

Pay Down Debt

One of the best ways to use a sudden large sum of money is to pay down or pay off your debt. After you pay off debt, you can start with a clean financial slate. Then the money you make every month will be used for the present and the future, not servicing money you spent in the past.

Create an Emergency Fund

How’s much is in your emergency fund? If you have nothing saved or only a thousand dollars or two, use your windfall to bulk up your emergency fund. Experts recommend saving six to 12 months of expenses in an emergency fund. If you have a steady, reliable job, go for the lesser amount. If you’re a freelancer or have a job that may get cut when the economy stalls, save enough for 12 months.

Invest

After you pay down your debts and bulking up your emergency fund, consider investing. This is one of the best uses of the windfall because you’ll continue to earn money through investing, making your windfall grow.

Contribute to Your Retirement

Getting a sudden large sum of money can make your financial future brighter when you contribute to your retirement accounts. However, the government limits how much you contribute to your retirement each year. Depending on how much money you receive, you may not be able to use it all by contributing to your retirement, or you will have to space your contributions over several years.

Buy a House

If you don’t own a home, now might be the time to buy one. However, even though you have a sudden large sum of money, don’t buy your house based on that money. Instead, buy a house that you would have been able to afford before you received the money. This assures that you won’t spend more than you earn. Use your newfound money to put down a hefty down payment.

By choosing a house you can afford based on your salary, you’ll be able to keep and maintain monthly payments on the house even if you lose the money you just inherited. (Sadly, many people who receive large windfalls end up broke a few years after.)

Contribute to Your Children’s College Funds

Another option is to contribute to your children’s college funds. When it’s time for your child to go to college, the money will be there waiting. You can contribute to a 529, or if you want to save money for your child without earmarking it for college, you can contribute to a Uniform Gift to Minors Act (UGMA).

Final Thoughts

When you come into a sudden large amount of money, you have many decisions to make. Take a few months to a year and do nothing. Wait for the shock to subside. Then, choose from one to several of the above options when deciding what to do with the money. Choose the options that will best serve you and your family. And don’t forget to earmark a small percentage of the money to spend and enjoy.

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MelissaB

Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in Arizona where she dislikes the summer heat but loves the natural beauty of the area.

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