Windfalls occur on many levels: winning the lottery (a one in 16 million chance), an inheritance, or a big promotion with a huge raise.
Assess Your Situation
I know you want to go all out and start spending tons of money. I know it's tempting. You think you have more money than you really do because you probably haven't had this much before.
About six years ago when I was in "Corporate America" I received a nice-sized bonus; with it, I was able to pay off my house. Did I sell that house and trade up? NO! I stayed put. I haven't changed my lifestyle at all and I've been banking what would have been my house payment ever since!
Take pause of your situation. Talk to your CPA; you may owe taxes on your windfall. Wouldn't that really suck if you spent all your windfall and had nothing to pay taxes on it?
Develop An Overall Plan
Here are the steps, in order, you need to take with your new-found cash:
- Take care of emergencies. Are you behind on your house payment? Make sure you're current on all your obligations.
- Create an emergency fund. Just as you fell into good fortune with your windfall, unfortunate things can occur as well and you need to be financially prepared for them so you won't go into (further) debt. A good rule of thumb for the amount of your emergency fund is the number of months' expenses it would take you to find a job to replace your current one should you lose it.
- Pay off your debt. There are two ways to approach this one: either start with the lowest balance, as this will give you a psychological boost, or start with the highest interest rate so you won't have to pay so much interest. Whichever method keeps you on the path is best.
- Put money aside for your retirement. It would be really cool if you could put 50% of your current salary in an investment account with the money from your windfall. The more the better.
Now It's Time To Have Fun!
Go out and buy something frivolous. I know it sounds strange coming from me; as long as you've taken care of all the above items, you should reward yourself. Take that dream vacation. Just remember to keep your lifestyle the same; you havent changed, neither should your lifestyle.
Have you, or anyone you know, received a financial windfall? How was the money spent?