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What to Do with a Sudden Large Sum of Money

January 10, 2022 By MelissaB Leave a Comment

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.

Beware These Financial Pitfalls When Choosing a College

Money Management Tips for College Students and Their Parents

Personal Finance is a Life Skill

December 17, 2013 By Shane Ede 11 Comments

ChristianPF posted a very thought provoking article a while back. In it, he talks about how spending money wisely is a life skill. The choices that we make in spending our money are the root of how we live our lives and can bleed through into the businesses that we run or work for. Basically, the way that you spend money is a very important.

I think I would take it one further. Not only is the way that you spend your money a very important skill, but, as the title of this article states, the entirety of your personal finance management is a life skill.

Schools all around the world concern themselves with teaching children life skills. Skills like writing. Reading. Wood Working. Mathematics. Science. And even Cooking (0ne of my favorites). Perhaps personal finance isn’t as important as things like mathematics, writing and reading (the three Rs), but I would argue that it’s just as important (or more so) than the rest. I would argue that personal finance is a life skill.

Improper management of your personal finances can lead to some pretty dire circumstances in your life. You can find yourself falling into a trap of revolving debt and upside-down mortgages. Too easily, you can find yourself making the choice between ramen and gas to go to work. And yet, people continue to put personal finances aside as something that isn’t all that important.

Over the last decade, I’ve spent my time learning many of the tenets of personal finance management. Even with the knowledge I had gained, it was a very difficult trip to take. I started as close to the bottom as I cared to get. I’m still a long ways from the top, but I’m getting there. And most of that is owed to learning to manage personal finances properly.

Take the time today to learn something about taking care of your finances. Teach it to your children. Teach it to your friends. If we all learn a little bit more each day, week, and month, we can turn our situations around and help more people. The more people we help with this, the less likely that our economy will ever find itself in this situation again.

Money Management Tips for the College Student and Their Parents

October 17, 2012 By Julian @ Frugaal 7 Comments

The cost of college can be eye-watering for many, if not all, students and parents alike; and it’s not just tuition fees that have to be paid, but all the living and additional costs ranging from rent to textbook purchases. With many families feeling the pinch of the economic downturn more than ever at the moment too, this makes going about college in a frugal way more important than ever. But it’s not just the student that can find ways to cut the cost of college, as it’s also the parents who will undoubtedly be funding some part (or all) of their son or daughters time at university too. Hopefully the tips below will, therefore, provide both students and parents with a few ways to make college expenses slightly more manageable.

Learning Resources:

Textbooks can cost over $100 dollars each. And if you buy all the textbooks you need, brand new, over the course of a four year degree you will spend a staggering amount. Buying second hand books is the obvious – and a very good – idea, but also consider buying older editions of the same textbook. Very often, from one edition to the next, the changes will be minimal and let’s face it, how much does a subject like math or statistics change? Also make the most of your university’s subscriptions to online journals. You’ll be able to access journals for free, and they contain more recent research findings than text books. Sharing textbooks with a class mate is also a way to half their cost which, again, can’t be a bad thing. As far as laptops and computers go, remember that a budget $400 dollar one will access facebook, allow you to type up essays, and send emails just like a MacBook can.

Discipline Yourself with Drinking and Going Out:

You want to have fun when you go to college, and don’t let money get in the way of that unless you’re in a position where you have to. But keep a cap on how much you end up blowing on beers and nights out with your friends. Think about setting a budget for this part of spending each week and sticking to it. Also, when you go out don’t take more cash than you can afford to spend and leave your debit/credit cards at home so you don’t get tempted into spending money you don’t have.

There are Times When it doesn’t Pay to Cut Costs:

Although cutting unnecessary costs and avoiding overspending should be encouraged amongst all college students, there are occasions where you need to take a more balanced view and sometimes pay that little bit extra. For example, it’s a good idea to replace takeaways with easy-to-cook homemade meals, and it’s also sometimes a good idea to replace fresh vegetables with frozen ones that are cheaper and will store for longer. But with your diet especially, you do need to consider keeping a bit of a balance. For example, whilst it might be possible to feed yourself on $10 a week, you’ll probably also end up jeopardising your health as you cut out certain food groups that are essential for a healthy lifestyle.

Another example of where it pays to spend that little bit extra is with heating bills. Students in shared houses are renowned for living in the cold to save their dollar bills, but a cold/damp house can lead to a number of health problems. For example, dampness can lead to an increase in allergens and dust mites that can exacerbate and induce asthma. A cold and damp house will also do no good for your immune system, increasing your propensity to get a cold or the flu as well.

And Some Tips for Parents:

As mentioned, most parents will take on board some or all of the financial responsibility for their son or daughters college expenses. And for that reason, you too can also have a big influence over how much money gets spent across the course of their undergraduate years. Therefore rather than giving them a lump sum of cash at the start of each semester for example, think about a weekly direct debit instead. That way, they won’t be able to spend all of their allowance at once and they’ll find it easier to budget for all the costs they encounter.

Another important thing for parents to do is to foster a relationship of mutual respect and understanding when it comes to managing college expenses. As a parent, you need to encourage your son or daughter to be open about any of the financial difficulties they might be having. That way, they won’t end up trying to sort out a problem – like a late credit card payment – themselves, which might only escalate into a bigger and bigger problem later down the line. Showing that you understand the fact that there will be other things they want to spend their money on aside from textbooks and fresh groceries will also go a long way in fostering this all important two-way line of communication.

img credit:NazarethCollege on Flickr.