Some say that life is like a game of Monopoly (not just the Game of Life). In Monopoly, random things happen when you land on the Chance space. Sometimes our lives land on the Chance space as well.
You turn over your Chance card and it reads:
Unfortunately, your uncle passed away. But there’s good news, he left you an inheritance of $250,000!
To you, that’s a ridiculous amount of money, more than you’ve ever had before. So many opportunities! But then again, how many stories are there of people who hit the lottery and then squander it? And this amount isn’t even close to the amount lottery winners take home.
The question is:
How do you use this money so it has the greatest impact on your life?
Before going crazy with taking a once-in-a-lifetime trip or putting a down payment on that dream home, take the following steps:
1. Stop and breathe.
The money isn’t going anywhere. It’s yours! Don’t be in a rush to spend or use it. Perhaps take the time to map out how you are going to do the following steps.
2. Set up your emergency fund.
If you don’t already have one, you need an emergency fund of cash for further chance events that will happen in your life. This influx of cash can go a long way to set you up for a healthy financial future. Typically 3-12 months of expenses, depending on the stability of your job (or other income) is a good amount.
3. Pay off your debts.
After setting up your emergency fund, paying off your debts is the next priority. Paying off debt accomplishes two things: a) It automatically provides you a guaranteed return in the amount of your interest rate, and b) frees up your budget from paying it off, leading to using that money for investing retirement, and other goals.
Some might ask, why create the emergency fund first before paying off debt? The reason is simply about leaving yourself flexible. If you pay off debt but end up going into more the following month, what does it accomplish? And if that is the situation, you are simply living beyond your means.
4. Take care of your needs.
This is where you get to do things you have put off for a while because you didn’t have the budget or savings, whether it is buying new clothes for work, replacing your ancient vehicle, or making a home improvement that is long overdue. Once you have taken care of steps 2 and 3, use some money to take care of these life improvement issues. This does not mean that it is time to be frivolous, but it allows you to handle your “to-do” list around the house.
5. Invest the rest.
Congratulations. You have a cash cushion, paid off your debts, and have even taken care of all those household to-do items. You are thankful that you have been able to take care of all your current financial issues. But your financial life is not done. While you have gotten rid of some of your more immediate stresses, you now get to look out into the future and use the rest of the money for other plans and objectives in the future.
Work with a financial planner to start elucidating those priorities, getting them on paper, and planning out how to get there, like paying for your children’s education, a down payment on a home or apartment, or accelerating your retirement funding. The wide world of investments will be one way to help you achieve what you seek.
However you obtain your windfall - inheritance, lottery, selling a company, or even winning a lawsuit - taking these steps to think about and plan how you will use your new-found money and use it in the way for it to have the greatest effect on you, your family and others you care about.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.Investing involves risk including loss of principal.