Spend, Save or Invest? What to do When You Get a Windfall

Most of us dream of receiving a financial windfall. While we aren’t too picky about the source, we just know that a windfall would be helpful in turning around sometimes-difficult circumstances.

But when that windfall does arrive, whether it’s a tax return, gift, inheritance, or lottery winnings, it’s important to be careful about how you handle the money. With the right approach, you can improve your fortunes still further, with your windfall continuing to give even after the initial amount has been assigned elsewhere.

Spend Sparingly

With a windfall, it’s best to spend sparingly. Treating yourself can make a lot of sense when you have a windfall, since it’s dull to do nothing fun. But you should spend sparingly. Using all of your windfall at once on a spending spree won’t help you improve your financial fortunes later on down the road. Carefully consider what you will spend some of your windfall on, and then stick to that budget. The rest should be saved or invested.

Saving and Investing

You will want to save and invest the rest of your money, putting that windfall to work on your behalf. You can save with cash products that return a fixed rate. Shop around and take time to choose the best fixed rate bonds and other products. These savings products will offer you a fixed return.

However, you don’t want to rely entirely on savings products that pay low yields. Even though some banks like Birmingham Midshires have some great rates at the moment, you don’t want to put all of your windfall into something with a fixed rate. This is because guaranteed rates are often quite low. In some cases, you might not even be able to beat the rate of inflation.

While you do want to put some of your windfall into something safe, you don’t want to put all of that money into a low-rate account. Some of it should be invested.

Investing some of your money in quality assets with the potential for higher returns can provide you with long-term gains from your windfall. Carefully choose some high quality investments like fundamentally sound stocks, equity funds, or dividend paying stocks. That way, your money will be put to work for you, allowing you to log more gains over time.

The returns from these types of investments will allow you to beat inflation and see real returns. However, you have to understand that with the potential for higher returns comes the potential for higher losses. Your money is safe in a savings product with a fixed rate of return, but that return isn’t very high.

Your windfall should be saved and invested carefully, with attention paid to balancing your potential for higher returns with the safety seen by lower-rate products. With a little careful planning, it’s possible for you to arrange matters so that your windfall isn’t a one-time increase. You can save and invest it so that the money keeps on working for you. Over time, this is much more valuable than spending the whole thing on consumables.

Image: Philip Taylor via Flickr

About the Author

Miranda is a freelance writer and professional blogger. See more of her writing at MirandaMarquit.com. Her book, Confessions of a Professional Blogger is available from Amazon.