Wednesday, 30 December 2015
So you scored a windfall. Maybe it was a bonus from work, an inheritance, the right answer on a game show, or even a lottery win (hey, it happens!).
But before you blow most of it on that exotic vacation, the home theater upgrade, or stock your closet with designer duds, there are some things to keep in mind.
OK, perhaps you'll want to do that initial nice dinner out. But after that, assess your financial goals and check where you are, says Jennifer Williams, BBVA Compass Vice President, Global Wealth and Financial Planner. The two most important areas to check are your debt, and your emergency fund of at least three to six months of living expenses.
The priorities will be different for everyone, depending on their unique situation and how much money has come in, Williams says. She used her friend, a single mom who received a significant raise, as an example. After paying down debt and building up her emergency fund, Williams suggested her friend make sure she's maxing out her employer 401(k) retirement account fund, and then contributing to the 529 college savings plan.
For someone older (assuming the emergency fund is covered and there is no debt), the next place is to funnel more money into retirement. "Make sure your savings, and your what I call 'the foundational issues' are taken care of," Williams says. This includes proper insurance policies estate planning documents (such as a will or trust), medical directive, and healthcare proxy. After that, you can focus on diverting some of the funds to investments.
There's nothing worse than blowing $15,000 on, say, a trip, and then realizing at tax time, you should have set aside $5,000 of it. Some lump sums come with a hidden cost—taxes. Most of the time, a work bonus check has the taxes withdrawn before you can spend the full amount. For other sources, you might end up having to give 30 to 50 percent back in taxes. Another possible problem is that the extra money might bump you up to a new tax bracket. Will you need to put some in a health care savings account, donate to charity, or max out a retirement account to mitigate those issues?
"I would definitely talk to your financial adviser and an accountant because you just want to make sure you understand how that's going to affect your taxes," Williams says.
"I'm not the type to say 'no, you can't have any fun,' because I think life is worth living," Williams says. But if it feels like you're itching to spend for the sake of spending, it's OK to set up a savings account for when you find something you really want or need.
Many people remember to take care of their friends and families after scoring a stash of cash, but one of the most important investments you can make is in your own life. "I definitely think you have to invest in you, whether that's taking a break and having a vacation or continuing education," Williams says. "It could be working on you."
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