Consider that … you won a thousand dollar lottery! What will you do with that money? Will you spend it all or will you save? Will you buy those latest gadgets that you were pining for? Will you splurge it on your loved ones with gifts? Will you put it in a bank and not touch it?

My first thought – to put it away in a fixed deposit so that I don’t do anything stupid with it. It is wayyy too easy to spend money. Especially when you think that this money is money which you didn’t have anyways, so spending it will not create a dent in whatever you have planned. (Because the logic makes sense, it is kind of even more dangerous )

Of course, spending it all away is always an option. But what if, you could use this money to strengthen your finances?

5 Ways To Use Windfall Gains To Strengthen Your Finances -

• Pay Off Your Debts/Loans

  I know I don’t need to sell you the idea of paying off debt. As you pay your debt off earlier, you will save money in terms of interest. In addition to that, if financial freedom is one of your life goal, paying off debt is the way to go.

  Which debt to pay first? The one which is costing you more (which basically means one which has higher interest rate). The more you prepay and reduce principal debt, lesser interest you will have to bear.

  Interestingly, there is one more strategy which is quite popular – known as snowball effect. As per this strategy, you pay off debt with lowest amount first. Don’t bother with interest. Reasoning behind this style is that when you pay off one debt in whole, it gives you the much required boost/motivation to keep working on the same.

  If you would like to see how both methods work out in a given scenario, Trent from TheSimpleDollar has written a detailed article on Which Debt Should You Pay Off First using a real life example.

• Put Them In Your Emergency Fund

  Your emergency fund should have at least 3-6 months of your monthly income. This seems to be true now more than ever.

  If you were a late starter and your emergency fund still has to catch up, use this money to give it a good jump. If you are a beginner, then too, this makes sense. Once you set up your emergency fund, you can start focusing on other investment options.

  And of course, once your form your emergency fund, don’t touch it unless there is a true emergency.

• Put Money In Your Preferred Investment

  There are a variety of options available to invest your money in. Fixed deposits, stocks, mutual funds, debentures, gold, other commodities, property etc. You can consider taking help from financial experts as well on where to invest money.

  If you are curious about certain investing options and would like to try out, but hesitate because of risk, you can invest partial amount from your windfall gain and see how it performs.

• Put It On Hold For Six Months

  This is one which I like the most. If the windfall gain is quite huge, it gets overwhelming to decide at once what to do with so much money. Parking it in a fixed deposit or a separate bank account (basically making it untouchable for a few months) gives you required space and time to get through emotions and think logically about what would you like to do with money.

  One added advantage of this method is that after six months or more, the windfall gain stops being a windfall gain and becomes your savings. The value of money from a windfall gain and value of money from savings is different. Just because after six months your windfall gain will become money that you saved, you will be more careful and thoughtful on how you use it.

• Use Envelope System

  The envelope system is very much like a dedicated piggy bank.

  You can dedicate your envelope to anything you want and let money accumulate in it. When you save enough money over a period of time, you will be able to buy something valuable which you want for yourself. This method is very effective when you get small amounts as gift (we get them on Birthday, Diwali, Meeting elders after a long time etc). The amount by itself wont get you anything. It will get spent in food or travel and create no memories.

  Accumulated money is a completely different matter. It has the power to buy you something valuable and cherished, something you will enjoy for a very long time. This is one of the best way to use gift money – it serves you a purpose and creates great memories.

  I usually buy gold coins from accumulated gift money.
  

• Set Percentages

  It is quite possible that you would want to do all of the above. You want to spend money, save money, invest money, increase emergency fund etc. In that scenario, setting percentages is the way to go. Decide before hand how will you divide money in all areas that interest you in percentages. For example – 10% for splurge, 10% for tithing, 40% debt reduction, 20% emergency, 20% invest.

  You can set whatever percentages you like based on your priorities and your financial position. What’s important is that you set this percentage before windfall gain and you stick to it.

  It will help greatly if you can decide before hand how would you like to splurge as well. If you focus on creating memorable experiences with your money, you will get a long term satisfaction from it.

What do you do with a windfall gain? What’s your strategy?

photo : wetwebwork