So you got great news at work — you’ve earned a big raise and/or a hefty end-of-the year bonus. Or, you received a big family inheritance, a large legal settlement or maybe even cashed in a lucrative lottery ticket.
Good for you — now keep the good fortune flowing and make some judicious moves with your new-found cash infusion.
Not everyone does so, unfortunately. According to a Vanderbilt University study, 70 percent of lottery winners wind up bankrupt.
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Plus, the “vast majority of people blow through a financial windfall or inheritance quickly,” says Jay Zagorsky, an economist at Ohio State University and the author of a comprehensive study on inheritance and financial windfalls. Zagorsky reports that inheritance recipients “save about only half of what they inherit.”
That’s a big problem, money experts say.
Avoid big purchases. “As a financial advisor, I see many people make mistakes when coming into a sum of money,” says Mike Zaino, chief executive officer and money manager with TZG Financial, in Charlotte, North Carolina. “I see money mistakes like going out and buying a new car, boat, motorcycle or some other adult toy. The problem here is that these things depreciate in value, upwards of 40 percent in the first two years.”
Look at that behavior from a unique angle, Zaino says. “If I were to recommend a financial move that we both knew was going to lose 40 percent of your money within the first 24 months, you’d think I was raving lunatic,” he says. “And you’d be right.”
Instead, manage the windfall money as if you never received it, he says. “Put it toward something of long-term benefit,” Zaino says. “For example, if you have a credit card with a 13 percent interest rate, paying it off is the same as getting a 13 percent return on that money.
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“Additionally, you could increase the contribution percentage to your 401(k) or, if you haven’t maxed out your retirement contributions for the year, add it to your IRA to receive the tax-deferred benefits; if there is any left over after doing that, increase your emergency fund,” Zaino says.
Invest in yourself. If you’ve received a financial windfall, squandering the cash is the worst move to make. Instead, use the cash as an asset-building platform that will last a lifetime.
“The best way you can spend a bonus is by investing in yourself,” says Thomas Jepsen, an accountant and chief executive officer of Contractorquotes.us. “For example, if you know that certain skills would be useful for your line of work, put that extra cash toward acquiring those skills. In turn, this will allow you to rise the career ladder more quickly, and will make its investment back many times over.”
Or, if you have some very expensive debt, such as payday loans, make sure to pay that debt first, as you’ll otherwise be paying a lot of compound interest, Jepsen says. “If you’re set on investing in something that’s not yourself, you need to look for where you either pay or receive the largest interest rate, and invest there. If you’re paying 5 percent on your loan but only receive 1 percent on your savings account, you’re better paying off the loan.”
Get some financial protection. “I would take another portion and put it away for savings or long-term investment,” says Jim Wright, chief investment officer at Harvest Financial Partners, in Paoli, Pennsylvania. “If you don’t have an emergency reserve, that’s a good place to put some of the money.”
Wright advises putting the funds in a savings account, certificates of deposit or short-term bonds or bond funds. “If you have that reserve covered, you can invest for a long-term need, like retirement, college or a first or second home,” he says.
Using the money as a stepladder to long-term financial stability is a recommendation widely applauded among other money experts.
“If the windfall recipient still has debt, I would recommend paying it off,” says Nolan Martin, an Army officer, financial advisor, and creator of the website BudgetChaos.com. “This would allow them to focus on the next steps like saving for retirement, paying off the home early or planning for future purchases.”
Also, focus on each step of your windfall experience, Martin says. “What I have noticed in my time in the military is when we try to do a little of everything without focusing on one thing at a time, we end up not getting anything accomplished.”
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Splurge, just a little. Being cautious with your windfall money doesn’t mean you can’t use some of it for a short-term lifestyle boost.
“It’s appropriate to take a little bit of the cash and do something fun, especially if this was a work-related bonus,” Wright says. “You worked hard for that money so you should enjoy some of it. Take a nice a trip. Or, buy something you want like new golf clubs, a piece of jewelry — something that makes you happy.”
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4 Tips to Avoid Wasting a Bonus or Inheritance originally appeared on usnews.com
