Mom Knows Best : Save, Invest, or Reduce Your Debt: What to Do With a Windfall

Thursday, January 19, 2017

Save, Invest, or Reduce Your Debt: What to Do With a Windfall


 It probably doesn’t feel like that long ago that your finances were really messy. You can probably remember the fear of opening your mailbox and calls from collectors all too clearly. So many of us have been there before and we know what it feels like to finally get out from under that mess.
Maybe you simply reorganized your debts by choosing one of the options for alternative payday loans online (also called installment loans). Now you have fewer payments to make every month and you’ve automated most of them but you still feel the hot breath of the debt wolf at the door.
Maybe you went the social funding or crowdfunding route and raised money from family and friends to help you get everything back on track. And, because friends and family tend to be extra generous, now you have more than you planned on having at your disposal. What do you do with the extra money?

 For many people, sitting on extra cash presents a strange sort of dilemma. If you’re used to never having disposable income, you might be tempted to splurge and buy something big that you’ve always wanted. Resist this urge! Spending your extra cash in one fell swoop feels great...but only for a second. Then the reality of all of the other ways you could have put that money to work for you start to set in and you can’t enjoy your new purchase the way you hoped you would.
There are three better options available when you have extra money on hand: you can save it, invest it, or use it to put a huge dent in your debt.

Saving
This is the simplest decision to make. Instead of figuring out what to do with the money, simply tuck it away in the highest yielding savings account you can find and let it grow. It can be your rainy day fund, your emergency fund, your future down payment fund. Whatever the end goal--stashing it and forgetting about it (or better building on it over time) is the easiest and most trustworthy way to go.

Investing
Investing is something that every person who hopes to find financial success should do. Investing is where you literally use your current money to make more money. Most people immediately flash on the stock market when they think about investing. There are, of course, other methods available. You might choose to invest in bonds or real estate or business. If you do decide to invest your money, don’t try to do this by yourself. Work with a trusted and professional financial advisor.

Paying Off Debt
If you still have debts that need to be paid, you might be tempted to throw all of your extra money in that direction. The less debt you have, the freer you will feel, right? Unfortunately getting out from under debt is something that should take a while. It is how you will learn to be more frugal and to put more thought into your spending in the future. Plus, paying off debt over time helps you build/rebuild your credit.

So which should you choose? What is the best use of the money into which you’ve fallen?
The answer to that is: don’t choose.
Wait, what?
You read that correctly: you don’t actually have to choose between those three options. A much better plan is to take your windfall and split it up evenly among these three choices. Put a third into savings, a third towards your debt, and invest the last third. This way you accomplish each goal.
From here it is important to put some safety guards in place so that you don’t fall into this hole again.
The best thing you can do now is put together a workable budget. You will be tempted to restrict yourself as much as possible. Don’t. It is much better to budget for fun expenses like new clothes, seeing movies, etc than to try to go completely without. If you deny yourself too much you’ll be more tempted to cheat.
After you’ve built your budget stick to it. If you don’t have a great track record here, you might want to try using the envelope method for ensuring that you don’t borrow from one part of your budget to fund another.

Obviously, there is no absolute safeguard against future financial difficulty. Even if you follow our suggestions and do everything perfectly, surprises can happen. Still, if you follow these tips you’ll be much better prepared for that eventuality than if you simply use your windfall to go on a shopping spree. 

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