Most of us, at one time or another, will get some unexpected money. From a tax refund, an inheritance, a work-related bonus, the pull of a slot machine: Sooner or later, into every life some unexpected money (hopefully) will fall. And when it does, you’ll confront the most pleasant of conundrums — what to do next.
Here’s this week’s reader question:
What is the best way to deal with a large inheritance? Something that is well into the $400,000 to $850,000 range? Age is only in middle 50s. — Tina
Here’s what to do, Tina, step by step.
1. Say nothing, do nothing
Don’t do anything at first: No shopping sprees, no donations to charity, no lending money to friends and family. Don’t even tell anyone. The last thing you want to do is risk wasting your windfall by acting on impulse, or encouraging friends or distant relatives to hold their hands out.
The greater the sum, the longer you should take to assess your financial situation and identify some short- and long-term goals. If the amount is significant, a month isn’t too long to wait. The money’s not going anywhere.
2. Define your goals
Most of us have a vague idea of what we want from life. Now’s a great time to turn those vague thoughts into an action plan by establishing specific goals.
One way to approach goal-setting is to imagine yourself on your deathbed. As your life passes before you, what would you be thinking about? Unless you’re as shallow as a puddle, you probably would be thinking a lot more about the times you had than the things you valued. You’d likely be remembering the people you touched and who touched you.
When you’re able to wrap your mind around the things in life that truly make you happy, all that’s left is to use your resources — both time and money — to bring more of those things into your life.
For example, if helping your kids brings you fulfillment, make it a goal that within X years, you’ll have saved X amount to help with things like college. If charitable work does it for you, make it a goal to donate X dollars by X date. If seeing the world is your dream, decide when you’re leaving and exactly how much of your resources you’ll use. If you love laughing with your spouse, make it goal to retire in X years with X dollars so you can spend more time together.
Once you know what you want, you’re better prepared to point your time and money in that direction and avoid getting sidetracked by other things.
There’s no limit to the goals you might have, and there’s no shame in putting things like a nice house, car or other material possessions on your list. But no matter where you want to end up, the shortest route is to decide in advance where you’re going.
3. Remove the roadblocks
Once you’ve established some financial goals, start removing the impediments to reaching them. One of the worst is debt.
If you have debt, especially the high-interest kind, pay it off. If you’re paying 20 percent interest on a credit card, paying it off is like earning 20 percent, tax-free and risk-free. That’s better than any investment you’re likely to find. So paying off debts, especially the high-interest kind, will make you richer and thus put you in a position to reach your goals faster.
There are instances in which paying down debt makes less sense. For example, if you’re paying 3 percent on a mortgage and can earn 8 percent in the stock market, you’ll obviously come out ahead by leaving your debt intact. But in general, debt is a monster that devours your available resources and puts you farther from the finish line. Destroy it with a windfall, or any other way you can.