Five Ways Not to Blow a Financial Windfall

Whether you’ve won the lottery, inherited a fortune or sold your business, landing a financial windfall can drastically improve your financial outlook. But the sudden wealth can also leave you stressed and unsure how to handle the cash.

First, hit the pause button, says Don Hance Jr., founder of LifeSighted, a financial planning company. Take time to create a spending plan to avoid making poor decisions.

“You want to give yourself time to take stock of everything and work through emotions before spending the money,” says Hance.

Here are five smart ways to allocate a financial windfall.

1. Cushion your nest egg
Maximize your 401(k) contributions if you still plan on working, or at least contribute enough to earn the full employer match, which is essentially free money for your retirement. As you put more money toward retirement, the windfall will fill that gap in your cash flow.

This move also carries tax benefits: contributions are taken out of your paycheck pre-tax, lowering your taxable income for the year. Investments grow tax-deferred until withdrawals at retirement.

Also, look into funding a Roth IRA if you’re eligible, says Mark McCarron, a financial planner and principal at Bond Wealth Management, LLC. Contributions to Roth retirement accounts are made after-tax, and your investments grow tax-free. Unlike a 401(k), there’s no income tax on withdrawals made in retirement.

“It is one of the only free lunches the IRS gives us,” McCarron says.

2. Pay off toxic debt
If you’ve been trying to pay off debt, this is an opportune moment. Pay off toxic debt with the highest interest rates first, such as credit cards, payday loans, title loans and installment loans.

For example, a credit card with a $10,000 balance at 20% interest would cost $11,680 in total interest if you made $200 monthly payments. It would take more than nine years to repay the debt.

Use your windfall to pay the balance in full, and you’ll save interest.

3. Build an emergency fund
An emergency fund is money set aside to cover unplanned expenses, such as car repairs or a job loss, so you don’t have to rely on credit cards or high-interest loans.

A good rule of thumb is to have three to six months of expenses saved, says McCarron.

The amount to save depends on factors such as job security and how much debt you owe. Keep the money in a high-yield savings account, where it earns some interest and is readily accessible.

4. Invest in yourself or a loved one
Investing isn’t limited to your retirement; you can also use some of the windfall toward self-development. Go back to school, hire a career coach, travel or learn a new skill.

Consider starting a 529 savings plan to support a child, relative or friend through college, says Levi Sanchez, financial planner and co-founder of Millennial Wealth, based in Seattle.

The plan provides tax-free investment growth and withdrawals for qualified education expenses, such as tuition, fees and books. Most states also offer a tax break for residents.

Under the current tax law, 529 withdrawals up to $10,000 per year can be used for tuition costs at elementary or secondary public, private and religious schools. Check with your state’s plan before making withdrawals for this purpose; not all states have adopted the changes.

5. Give back
Consider making charitable donations to an organization or social cause you support.

Your gift can positively impact the organization, but unless it’s a sizable donation, it may not help your taxes. That’s because you need to itemize your taxes to get a deduction, and itemizing only makes sense if your deductions add up to more than the standard deduction.

For 2018, the standard deduction is $24,000 for married individuals filing jointly or $12,000 for single individuals. Maintain records of your contributions if you donate.

Giving money to family and close friends doesn’t carry tax benefits. But if you’re feeling generous, you can give up to $15,000 per individual in 2018 without having to file a gift tax return, says Sanchez.
A financial planner or tax professional can provide further guidance on managing a windfall.

Steve Nicastro is a writer at NerdWallet. Email: steven.n@nerdwallet.com. Twitter: @StevenNicastro.

The article 5 Ways Not to Blow a Financial Windfall originally appeared on NerdWallet.

How I Ditched Debt: ‘Born Spender’ Goes on a Spending Fast

In this series, NerdWallet interviews people who have triumphed over debt using a combination of commitment, budgeting and smart financial choices. Responses have been edited for length and clarity.
and then we saved

And Then We Saved

Who: Anna Newell Jones
How much: $23,605 in 15 months

Anna Newell Jones considers herself a “born spender” whose desire for the latest fashions and gadgets landed her in debt.

When she got married in May 2009, she had a big secret — she owed nearly $24,000 in credit card debt, student loans and money that her parents borrowed for her. She was living paycheck to paycheck and felt like she had hit a bottom financially. So she shared with her husband, Aaron, a plan to cut her expenses to the bone, pay off debt and become a financial adult. And she decided to blog about her efforts to keep herself motivated and accountable.

First up was making a list of wants and needs customized to herself. Do-it-yourself hair color in a box made the “needs” list, but salon services did not. Then she did what she calls a reverse budget — she analyzed the previous three months’ spending to see where her money was going so she could determine what could be cut.

Newell Jones declared a “spending fast” in 2010: spending the bare minimum and only on necessities. The Denver resident found it freed up time previously spent shopping, returning items and worrying about the financial hole she was digging. That extra time helped her figure out how to increase her income, including photographing weddings on weekends, writing a book and creating her website at andthenwesaved.com.

» SIGN UP: Set and track your own goal to ditch debt

What was your total debt when you started? What is your debt today?

At the tail end of 2009, I [had] $23,605.10 in debt, and I managed to eliminate all of it in only 15 months! I have a mortgage now. Apart from that, I’ve been able to remain completely debt-free.

How did you end up in debt?

I’m a natural spender. I like new things. I used to live for finding that perfect shirt or decoration for my house. … Even though I owed money to others (like my parents for school), I was always able to find money when I wanted something. I was completely overwhelmed by my debt and thought I’d die with it, so in a lot of ways I decided, “Ah, screw it! Might as well at least enjoy myself!” Basically, I spent money I didn’t have on things I didn’t really need. I was reckless.

What triggered your decision to get out of debt?

I wanted my financial life to be about more than just covering my minimum balance each month or not bouncing a check. I got to the point where I was tired of feeling like crap about myself and the situation I had created for myself. I had, in a lot of ways, hit my “financial bottom.” I was desperate enough to make sacrifices and do whatever I had to to get out of debt.

What steps did you take to reduce your debt?

I made some very serious lifestyle choices … meaning I only spent money on necessities (rent, basic food, etc.) and nothing extra. I started my blog as a way to hold myself accountable. I thought that maybe if I went public about my debt and about how much it weighed on me, I’d be more likely to not immediately ditch the entire idea once things got difficult.

How has your life changed for the better since you got out of debt?

Oh man, it’s so much better! Life without debt, shame, worry and anxiety centered around money is so freeing. Before, I was stressed and worried all the time, and it showed. Now I own several businesses, have money to save for my family’s future, and have the freedom to spend more time with my husband and son.

How do you remain debt-free today?

I’m very mindful of my money and my spending. I regularly do reverse budgets [to watch for overspending issues that could crop up]. I also run a Spending Fast Bootcamp and connect with members of the bootcamp each week in Facebook Live videos. Helping them helps me stay aware and present, rather than mindlessly slipping back into my old “spender” ways.

How to tackle your own debt

Jones, who says her blog kept her accountable, wishes she had known about other people who were also battling debt and also felt ashamed and isolated. She created just such a community on her website. Support and accountability can help, she says.

  • Analyze your current spending, to see where money has been going and pinpoint expenses that can be reduced or eliminated
  • Identify your own wants and needs. Needs are non-negotiable, while wants can wait. But every person’s list will vary.
  • Save for an emergency fund. When you are trying to repay debt, watching balances go up can be discouraging. But emergencies will happen. Be prepared with money designated for just such occasions. An amount as low as $500 in reserve can insulate you from an unexpected expense and running your credit cards back up.

More From NerdWallet

Bev O’Shea is a writer at NerdWallet. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

The article How I Ditched Debt: ‘Born Spender’ Goes on a Spending Fast originally appeared on NerdWallet.

Declare Your Independence From Credit Card Debt

Independence Day is just around the corner bringing with it cookouts, fireworks and community celebrations to honor this important day in American history.

But what about your own independence? Your financial independence?

Every day is a good day to consider the health of your finances, especially if you have a large amount of consumer debt. If you are looking to reduce some of that debt this year, here are four simple tips to help you get started.

  1. Put away the card – If you already have credit card debt, you don’t need to accumulate more. Stop using your card and focus on paying down the balance. It may be painful at first but it will be worth the victory of seeing a zero balance. If you do use your card, be sure to pay off those charges each month.
  2. Cut expenses – Look for ways to trim your budget and apply the savings to your debt pay-off. Shop around for a better phone deal, reassess your insurance rates and look for ways to save on your utilities. For some, eliminating a meal out each week is a painless way to save a few dollars. Remember, when it comes to debt, every dollar counts.
  3. Budget – Make a budget that accounts for every dollar in and every dollar out. It doesn’t have to be fancy. You can use a pen and paper or an app on your phone. Just be sure to list every expense, including those that occur irregularly like property taxes and car maintenance. Be realistic in your planning but be sure to give every dollar a job. Each dollar should be committed to an expense or a savings goal. As you create your budget, if you find that you have more expenses than income, see step three above. It’s time to work on reducing expenses. Also, review your budget regularly to remind yourself of how much money you have available and why you are cutting expenses. Keeping a log of daily expenses may open your eyes to small expenses that add up quick like morning coffee, magazines and other nonessentials.
  4. Prioritize – If you have a balance on more than one card, prioritize the payment schedule. Some people like to focus on the card with the smallest balance. In doing so, you will celebrate an accomplishment of paying off a debt quickly. Others like to choose the card with the highest interest rate and focus extra payments there. Whatever you do, remember to always pay the minimum balance on every bill. Also remember that once you pay off one debt, you need to apply the funds you were spending there to the next bill on your list. This “snowball effect” will help you pick up momentum and pay off debt faster.

If you have a large amount of credit card debt, it probably didn’t accumulate overnight so you can’t expect to pay off everything overnight either. However, making a few changes, and even some sacrifices here and there will go a long way toward helping you achieve your financial goals.