Millions of taxpayers just received their income tax refunds – were you one of them? At some point, most of us will receive a windfall of some sort. You might be granted a work bonus, receive an inheritance, or even win some money in Vegas. Whatever the source, it’s normal to feel tempted when a windfall of cash lands in your lap. But instead of rushing out to buy the latest high-definition TV or a fashionable accessory, make a plan to put that money to work.
Choosing any of the following actions can result in a brighter financial future, and one day you will be glad you made a responsible decision with your extra cash.
Pay down debts. Many people make only their minimum payments on credit cards each month, resulting in years of debt. Since many cards carry an interest rate of 15 percent or more, you end up paying much more for your purchases than their original prices. You don’t want this debt to follow you into retirement! Putting your entire windfall toward credit card debt can make a significant dent in your overall debt load. Just remember not to run up another large balance, or you’ll be right back where you started.
Establish an emergency fund. One of the reasons most people incur large debts is because they don’t have a significant emergency fund stashed in the bank. Put your windfall into an easily accessible savings account, and you won’t have to worry about borrowing money (often at a high interest rate) when you suddenly need extra cash.
Open and fund a Roth IRA. If you’ve already maxed out your employer-sponsored retirement account, or you aren’t eligible for one, then stash any extra funds in a Roth IRA. You can save after-tax dollars for retirement, and enjoy tax-free growth over the years. Once you finally retire, you will have a source of tax-free income!
Pass on a valuable lesson to your kids or grandchildren. If you feel well-prepared for your own financial future, you can use a windfall of cash to teach a valuable lesson to the younger generations. Help your child or grandchild establish their own savings account, and they can reap the rewards of growth. Even a small investment today can really pay off in a few decades.
For more information about retirement planning, or for general finance advice, give us a call. We will be happy to discuss your goals, and help you create a plan for the future.