When you receive a cash windfall, you have the perfect opportunity to improve your finances. Use Money Girl's checklist to ensure you're in the best possible financial shape.
Q. I just received $10,000 and can’t decide what to do with it. I have a ton of high-interest student loan debt from law school and want to buy a car soon. I have income because my husband is working, but I’m unemployed. Should I save the money, invest it, or use it to pay down my debt?
A. When you receive a lump sum of cash, you have the perfect opportunity to improve your finances. No matter if the windfall is a gift or a performance bonus, use this quick checklist to know what’s best for your situation:
Do you have an emergency fund? If not, that’s the first place a cash windfall should go. Always have a minimum of 3 to 6 months’ worth of living expenses tucked away in an FDIC-insured savings or money market deposit account. You won’t earn much interest—but the goal is to keep the money completely safe in case you have an unexpected financial hardship, like losing your job or getting sick.
Do you invest for retirement? If your emergency fund is set, the next priority for a windfall is retirement. Ideally, you should be investing a minimum of 15% of your income for the future. If you’re not already taking advantage of a workplace retirement plan, you can open and contribute up to $5,500 (or $6,500 if you’re 50 or older) to an IRA for 2014 and 2015. Investing (even small amounts) earlier, rather than later, makes it easy to grow a huge nest egg with less.
Do you have expensive debt? If you have healthy cash reserves in the bank and are setting aside money for retirement on a regular basis, you’re in a good position to begin paying down debt. Just make sure to tackle it in the order of highest to lowest interest rate, so you can cut your expenses as quickly as possible.
Other Links You Might Like:
Your Guide to the Roth IRA
Should You Invest Your Emergency Money?
10 Things You Should Know About 401(k) Plans
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