What is the smartest thing to do with a large sum of money?

Pay down debt: One of the best long-term investments you can make is to pay off high-interest debt now. This is especially true of credit card debt, which is likely costing you between 10% and 15% a year, which is much more than you can reliably make by investing your money.

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Sudden financial windfalls come in many forms. You may have no idea you’re about to receive some money, and therefore no real plan to deal with it. If you do receive money unexpectedly you should put it aside until you assess your situation. That will help you manage your good fortunes better and place you in a considerably healthier overall financial position. Here are a few other things you should do if you get a chunk of money that you weren’t expecting.

Assess Your Debt

The first thing you want to do is look at your overall debt situation. Is your windfall enough to pay off some or all your debt? The key is to assess and identify the debt that has the highest interest rate. You want to pay that debt entirely off, if possible, first. The best way to determine what debt to pay first is to make a list. Write down your debts and the interest rates you’re paying for each one. Start paying off the debt with the highest interest rates and work your way down to the debt with the lower rates. If you cannot pay all your high-interest debt with your windfall, pay as much as possible and focus your attention on other high-interest debt. Some people focus on paying the most significant debt off first, but that is not always the best plan. Without careful consideration, high-interest debt can quickly spiral out of control, becoming massive unsecured revolving debt. In other words, it can become your own financial albatross. That is why you want to pay that debt off first.

Laying Out a Plan

Before you do anything, make sure you take care of your tax obligations. Otherwise, the IRS could come back to hit you with a painful bite in the form of penalties and fees. Work with your accountant to determine how much of your windfall is subject to taxation and how it will affect your income tax rates. Make sure to set aside enough to cover the required taxes. Second, make sure you set aside some money to enjoy. Life is too short, and there are no guarantees. While it is always wise to think of the future, it can be foolish to do so entirely at the expense of today. Have a little fun with your windfall. You have earned it! Next, work on your debt situation. It is always good to have a plan going into negotiations and talks with creditors. Having cash on hand places you in a position of power dealing with them. Many of them will be more than happy to negotiate on things like interest rates if you promise to pay the principal in full.

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Future Opportunities

Do not forget to look for ways to invest your money. Paying off debt is one thing, and it’s a good thing. You do want to remove some of the weight debt places on your shoulders. But, you should also plan for the future with your windfall. That means setting aside some money for an emergency fund and investing the rest. If you do not currently own a home, you might be interested in using some of your windfall to make a down payment on a home. It is the ultimate investment in the future for your family. If you have a mortgage, consider paying it off if you have already paid off higher interest debts. Alternatively, you might put some money into an investment property or a vacation house that you can use part of the year and rent out to others for the remainder of the year. Your financial windfall has created economic opportunities for you. Take advantage of that opportunity and improve your financial situation for life.

Bottom Line

Assess your debt situation and eliminate high-interest debt when possible.

Always take care of Uncle Sam first.

Have a plan for using your windfall wisely.

Seek future opportunities to put your windfall to work creating future windfalls.

Do not forget to take a moment to enjoy your windfall with a little splurge for yourself and your family. Then get to work using your financial bounty wisely.

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