Wondering what to do when you are making money? Getting a small windfall or a large sum of money can feel great, overwhelming, or both. (Plus sad if it’s due to an inheritance or settlement.)
It’s normal to have mixed feelings.
But no matter what, it is wise to take some time to think about what to do before taking action. Don’t just dream either. I’m not talking about “If I won the lottery I would pay off all my debts and buy a new house” type of daydream.
I’m talking … what if you have an additional $ 250, $ 1,400, or even $ 100,000 in cash? A lot of money that you weren’t expecting, but not a sum of money that could last you for a lifetime.
They don’t want to look back and have nothing to show or how the lottery winners end up who go broke.
To help you out, here are some thoughts on what to do when you are making money.
What to do first when making money
The very first thing to do when making money is … next to nothing.
It doesn’t matter if it’s a large sum of money or a small godsend. Keep the money safe, but don’t do anything else with it right away. Instead, take a short break.
Why? Because as the saying goes: act in a hurry, repent calmly. This means that you may be in a hurry to do something that you will regret later. And when the money is gone, it’s gone.
So give yourself at least 24 hours before making a decision, and ideally longer. Use the time to make plans and think. (Especially if it’s a lot of money or you are feeling emotional about related events.)
If you’ve somehow won a major lottery jackpot, do your best to remain anonymous. Don’t tell your family, friends, or strangers. Instead, make copies of the ticket and put the original in a fairly safe place. (Like an actual safe or locker) Then talk to the experts. Check with a lottery attorney, accountant, and fiduciary financial advisor before making a claim.
If you’ve come up with a large sum of money any other way, reaching out to a fiduciary financial advisor is also a smart thing. (Along with the non-transfer of your happiness.)
What to do with your windfall
There are many things to do with your stroke of luck. You can:
- to pay off a debt
- Save it
- Spend it
- Donate it
- Or a combination of the above
Try not to let the decisions overwhelm you. The funny thing is that the sum is probably both a ton of money and not enough for all you can do.
1. Use your windfall to pay off debts
If your goal is to get out of debt, using your fortune to pay off can be a GREAT use of the money.
But it’s very likely that if you’ve already worked hard to pay it off, it will make a difference in the long run.
That’s because changing the way you think and act is HUGE parts to successfully becoming (and staying!) Debt free.
Whether you’re using a debt snowball or a debt avalanche, putting it on the next debt or debt on your list can really speed up your progress.
If you are still unable to successfully pay off debt, you run the risk of using your unexpected money to repay it and then running into debt again right away. So, if that’s your goal, consider doing a little practice first and hanging on to the money a little.
2. Save for the future
This is another great choice of what to do when you are making money.
You can use the money to start or top up your emergency fund. Or, you can save it for an upcoming issue or big future goal.
When you are saving for something in particular, the goal is to hold on to your money so it is there when you are ready to use it. That means keeping it in a safe place instead of using it to do more.
Good places to keep the money are in a regular savings account with a bank or credit union. Banks and credit unions also offer certificates of deposit (CDs). These can also be good if you know you won’t need the money for several months and want to earn a little bit of interest.
(I use the Capital One savings account because it’s easy to create more than one account named Any.)
Just make sure you don’t enter more than the FDIC or NCUA insurance limits per account holder. (Which is a nice problem since the limits are $ 250,000.)
3. Invest for the long term
If you have a lot of money (or even a small amount to start with) it is wise to invest it for the future.
Investing doesn’t have to be difficult. (And if you want, an advisor can help you here too, who only charges a fee.)
You can open a retirement IRA account, a 529 for kids’ college, or a regular investment account. Vanguard is a great place to invest in index funds. Ally is good for mutual funds and individual stocks.
Just make sure that you actually make the investments after opening an account and that you know your level of risk.
You may also want to invest in real estate, or anything that appears to be a solid investment. Remember, if it seems too good to be true, it probably is.
4. Spend part of your unexpected profit
Also, it’s always an option to spend some of the money on whatever you want. And a funny one too!
This can mean anything from going out to dinner at a fancy restaurant to buying a new washing machine for good that won’t eat your clothes.
Just don’t go around wild here when you have other things to do with the money.
And be aware of the ongoing costs that can be associated with anything you buy. For example, if you go for a shiny new car, you have shiny new insurance costs.
It’s a good idea to keep the “spend” portion of what to do when you make 10% or less money. So remember to put this amount aside so you don’t get carried away.
5. Donate to charity
Donating to charity can also be fun and fulfilling.
Make sure you choose reputable charities where most of the funds are really going to help people. (Instead of getting too high salaries.)
By choosing a local charity, you may be able to see for yourself the impact your donation will have, which is great.
Save all receipts for your taxes. You may also want to instruct them not to add you to mailing lists and not to share or sell your information. This will reduce requests for repeated donations.
6. Mix it up
Of course, you don’t have to pick just one thing! You can take any combination of the above. There is nothing wrong with using your newfound profit for more than one goal.
In fact, I would argue that the best thing you can do when you are making money is going through all of the plans you had before you got it.
Was your goal to get out of debt and buy a home? Put it to this.
Are you working on funding college for the kids or saving up for a trip to Disneyland? The same goes for.
Your goals and the way you handle money shouldn’t change just because you have a large amount of money. You should only be able to get there a little (or much) faster. Use the gust of wind to speed up your timeline.
The source of your money shouldn’t change what you want to do.
What brings us to what Not to do with the money.
What not to do when you are making money
Most people who make a little extra money – whether that’s $ 20 or $ 2,000 – tend to think of it as money to blow up. You’re buying something special, going on a trip, or splashing things for friends and family. And when it’s gone, it’s gone.
So basically … don’t do that. Don’t blow it. Treating yourself and spitting a little is fine. But the key is a little. Don’t go overboard.
Don’t be guilty of taking care of other people’s problems or donating to places that weren’t your idea.
And don’t forget about taxes and estate planning either. Part or all of the windfall may be taxable. And if it’s a lot, you could end up getting a higher tax rate than you are used to. So don’t use everything. You don’t want to end up owing to the IRS. Update your wills and beneficiaries on all new accounts when you have received a life changing sum.
After all, don’t go out there and change everything in your life. Focus on the parts of your life that you already love and solve any bigger problems you may have. Otherwise, stealth wealth can be a good thing. There is nothing like knowing that you have money to go into the future and being a good steward of the money.
In summary, think about it and make a plan
No matter what you do with a stroke of luck, do it on purpose. Take your time.
Think about your actions and decisions and you will be a lot happier than if the money were suddenly just gone.
So what will your plan be And if you’ve had gusts of wind in the past, what did you do with it?