How to Use a Financial Windfall to Improve Your Finances

Whether you got a bonus at work or won the lottery, a financial windfall is always welcome. After all, who doesn’t love when extra funds hit their bank account? What you do with those funds can have a big impact on your financial situation.

If you want to use your financial windfall in a positive way, you are in the right place. We explore the steps you can take to improve your financial situation after receiving a windfall of any kind.

What Is a Financial Windfall?

A financial windfall refers to a substantial and unexpected influx of money. Unlike regular income, which is earned through consistent efforts, a windfall is an unforeseen boost that brings a surge of funds into someone’s finances.

Windfalls can enable individuals to address significant financial goals or challenges that don’t fit within their regular budgets, offering an opportunity to make substantial improvements to one’s financial well-being.

Some common types of financial windfalls include:

•     Tax refund: A tax refund can be a financial windfall, especially if it exceeds what was anticipated.
•     Bonus: A bonus is an addition to an individual’s regular employment income. Typically awarded by an employer based on performance or company profits, a bonus can serve as an unexpected opportunity to enhance financial well-being.
•     Inheritance: An inheritance is a bequest of assets or money from a deceased relative or benefactor.
•     Unclaimed property: Unclaimed property includes funds or assets that belong to an individual but have been overlooked or forgotten. These unclaimed funds, often originating from sources like forgotten bank accounts or uncashed checks, offer a surprise opportunity for financial improvement.
•     Lotto winnings: While less common, winning a payout from a lottery could provide a substantial financial windfall.

How to Use a Financial Windfall

The feeling of receiving a windfall is undeniably great. But once you’ve celebrated the win, it’s time to make a plan for how you want to put these funds to good use.

When you receive a windfall, what you do with those funds can make a significant difference. Below are some positive ways to use a financial windfall to move your money situation in the right direction.

Pay Off High-interest Debt

High-interest debt is a drain on your financial situation. That’s especially true of credit card debt, with average interest rates sitting above 20%, according to the Federal Reserve. If you have any form of high-interest debt, it will likely put a significant amount of pressure on your household budget. A windfall could be exactly what you need to eliminate your high-interest debt for good.

The decision to allocate a windfall towards debt repayment contributes to enhanced financial freedom and flexibility. Once debts are paid off, you’ll likely find some breathing room in your monthly budget. This newfound flexibility can be harnessed to pursue other financial objectives.

Build Your Emergency Savings

Life happens. It’s not uncommon for life to throw an unexpected expense your way. Some things that might throw your budget for a loop include car repairs, home repairs, and medical bills.

You cannot control what is coming your way. But it’s possible to get prepared by building an emergency fund with the money from your windfall.

In general, experts recommend tucking away three to six months’ worth of expenses into an emergency fund. But the exact size of your safety net comes down to your risk tolerance, financial situation, and obligations.

For example, my career as a freelance writer comes with big income swings. In order to prepare for potentially slow seasons, I opt to have an emergency fund that would cover an entire year of expenses. Other households with dependents, like children or pets, might decide to keep their emergency fund on the bigger side to absorb extra costs, like visits to the vet or doctor.

For most, it’s difficult to build an emergency fund overnight, and it may take a few months or years to reach your goal. But if you’ve just received a windfall, you might be able to stock up your emergency fund immediately.

Invest for the Future

Once you’ve covered your bases for the short term by paying off debt and stocking up your emergency fund, it’s time to consider your financial future.

Rather than spending windfall funds impulsively, investing them wisely can potentially generate substantial returns over time. By selecting an appropriate investment vehicle, such as stocks, bonds, mutual funds, or real estate, you can harness the power of compound interest and market growth to steadily increase your financial resources, contributing to a more secure and prosperous future.

By directing windfall funds into retirement investments, you can ensure that your financial windfall continues to work for you well beyond the immediate term, setting the stage for a comfortable retirement complete with financial security and peace of mind.

Invest in Yourself

Traditional investing isn’t the only way to invest. If you received a windfall, it might be time to invest in yourself. How you invest in yourself will look different for everyone.

Some ideas include pursuing more education, reading a new book, spending more time outside, purchasing healthier groceries, getting a gym membership, hiring a personal trainer, and more. Take some time to think about ways you’ve been wanting to invest in yourself. If something has been on your mind, now might be the time to take the leap. You can use your newfound funds to cover the costs of investing in your well-being and earning potential.

If your financial needs are met, don’t be afraid to spend the money you’ve received to improve your life in a way that’s meaningful to you.

Fund a Big Purchase

Most of us have some big purchases coming down the pipeline. A few common examples include buying a home, purchasing a newer car, paying for a child’s education, or paying for a major medical procedure. If you have something in mind, using the windfall toward the purchase can help you make your goal a reality.

Of course, the size of your windfall will dictate if you can cover the entire purchase in cash. But if you have the option to cover a big purchase or make a bigger down payment than you originally planned to, it can leave you more wiggle room in your monthly budget.

Have Some Fun

After a windfall, it’s tempting to spend all of the money on fun splurges. If you’ve taken some of the action steps on this list, you are already ahead of the game. But it’s important to remember that you should still have some fun along the way.

Take the time to treat yourself to something meaningful to you. Whether you decide to finally take the trip you’ve been dreaming about or make the purchase that completes your wardrobe, using your windfall to have some fun is a good idea.

The key is to not go overboard. After all, you want to set up a bright financial future for tomorrow too. Before splurging, go through some of the steps above. But if you’ve paid off your high-interest debt and have a fully stocked emergency fund, consider using a portion of your windfall for an enjoyable purchase.

Ask for Help

A large financial windfall is a blessing, but it can also come with some unexpected worries. If you want some reassurance that you are using the funds in the best way possible, don’t be afraid to ask for help. But make sure to do your research first.

In general, it’s best to work with a fee-only financial advisor who has a fiduciary duty to protect your best interests. A fee-only financial advisor should be able to help you map out a plan that makes the most of your newfound cash. When you find someone you can trust, you can get the personalized advice you want.

FAQs

How Do You Handle a Financial Windfall?

If you receive a financial windfall, start by using the proceeds to pay off any high-interest debt. Beyond that, you can use the funds to build your savings, invest for the future, cover a major purchase, or create some worthwhile memories.

What Is Considered a Large Windfall?

Everyone has a unique financial situation. If you receive a windfall, it might feel large if you can use the funds to make significant financial progress. For example, the ability to pay off a credit card or fully stock your emergency fund could mean you’ve received a large financial windfall.

The Bottom Line

A financial windfall can be a game-changer. If an unexpected pile of cash hits your bank account, taking action can set you up for a bright financial future. But don’t forget to have some fun as you celebrate this big win!