Have you recently come into a $50,000 windfall, such as an inheritance? You may be tempted to buy a new car or take your family and friends on a dream vacation.
But before you do, stop and consider all of your options — including saving the money...who would've thought a financial advisor would recommend this. 😁Developing a sound financial strategy is a good way to make your money grow.
If you’ve been imagining about what you might do with the extra cash, being “practical” might not sound so exciting. But if that $50,000 could put you on the path to financial freedom, being practical may actually sound really appealing!
Deciding how to best use your windfall offers several opportunities based on your financial concerns and circumstances. You may decide it makes the most sense to speak with a professional first.
If you’ve never worked with someone regarding your money, this may sound intimidating. But getting professional input and knowing your options and reviewing your potential financial scenarios, makes planning easier.
With that said, let’s take a look at some smart financial decisions on what you can do with that $50,000.
Eliminating some or all of your current debt is a smart move. Make a list of all your current creditors along with the amount owed. It’s a good idea to prioritize the list.
For example, credit cards with high interest rates should top your list. Paying off high interest rate credit card balances can save you a surprising amount of money.
Though $50,000 may not pay off your mortgage, you may still be able to pay off an equity line against your home if you have one. Often the interest rate on equity lines can fluctuate and you may be paying a higher interest rate than when you first opened the line of credit.
Likewise, if you can pay off your mortgage, feel free to do so. Owning your home and living mortgage-free is an amazing step to financial freedom. Just imagine having that debt eliminated.
Other debts may include car loans or personal loans. Once again, you’ll need to prioritize. Understanding your loan terms, such as interest rates and the duration of the loan, can help you decide which ones to pay.
When it comes to paying off debt, $50,000 can go quickly, depending on your current financial circumstances. If figuring out what debts to pay seems a bit too overwhelming, seeking guidance can be beneficial.
After you’ve eliminated as much debt as possible, consider learning more about household budgeting. Nearly one-third of all American adults approach the task of budgeting with trepidation and fear. Learning to budget — and removing the stress — can be a helpful part in attaining your future goals.
Many Americans live without adequate emergency funds. Basically, an emergency fund is the equivalent of at least three to six months of expenses. The fund is to help carry you through unexpected financial challenges. Since you need to access emergency money quickly, placing the money in a high yielding online savings account is preferable.
The emergency fund is your safety net. As you know, unexpected financial expenses can occur at any time — and often at the worst of times! Expenses such as car repairs or needing to replace a car, a job loss or a high medical bill can create considerable financial stress.
Money set aside and earmarked for financial emergencies ensures your bills are paid and you can comfortably endure a potential crisis — without having to borrow and creating more personal debt.
If you already have an emergency fund, add more money to it if it’s running low. Or consider increasing the amount of your safety net. Depending on where you live and your cost of living, three to six months worth of savings may not seem like enough. Figure out your ideal financial cushion and fund your account accordingly.
If you have children, it’s never too soon to think about an educational fund for them. $50,000 could definitely go a long way to saving for college.
Many parents stress about having enough money to cover college costs. The general rule of thumb is to have at least 25-50% of the estimated costs of college set aside for each child. When you think about tuition, books and living expenses over the course of four years, that can quickly add up.
One popular way to fund a college account is with a 529 College Savings Plan. These are offered through your state and provide tax benefits when you contribute. These plans offer different investment strategies and you can use them for your kids or grandkids.
If you think your child might be interested in a trade school or other training, such as beauty or chiropractic school, no problem. Many other types of educational training are covered under this college savings plan. Your state-sponsored 529 College Savings Plan administrator can provide you with information regarding covered learning institutions.
Other college savings account options are available, often depending on your financial situation. Like the 529 saving plans, most of these also offer some type of tax advantages when making contributions. When planning for college, talking to a professional can give you the guidance that you need for choosing the best plan. Plus, you want to understand and avoid any tax consequences, such as early withdrawal penalties, with college savings accounts.
Funding your retirement account provides a nice tax shelter for your $50,000 windfall. If you’ve tapped out the maximum contribution for your work 401(k) or 403(b), consider opening an individual retirement IRA account. Saving for retirement can help make your golden years more golden.
When it comes to IRAs, there are some different choices with varying annual contribution limits. For example the current annual limit for a traditional or Roth IRA is $6,000. (If you’re over 50, it’s $7,000.) But if you’re self-employed and have a SEP IRA, the current annual contribution amount is $57,000.
Retirement accounts offer a tax-sheltered mechanism for building your nest egg. If you withdraw money prior to age 59½, there are some tax penalties. If financial freedom and enjoying your later years is a major goal for you, funding your retirement accounts may be a priority.
If you’ve already paid off your debts, have an emergency fund, saved for college and fully-funded your retirement accounts, congratulations! But you may be wondering what to do with that $50,000.
Another option is simply to invest it in a taxable account. You can start an investment account or add to existing investments. What are your long-term goals, both financially and personally? Maybe you would like to carve out a bit for a new home entertainment system and invest the rest.
Your investment strategy will most likely depend on your current goals, your comfort level and your family obligations. For example, maybe you’d like to set aside some money in an account for an aging parent.
Your investment strategy may change over time. Early on you may prefer a higher risk portfolio with more exposure to stocks. This can shift over time when you may desire less potential risk and a more conservative approach to investing.
You might even take a few thousand dollars and try your hand at investing on your own. For no commission, fee-free investing check out this comparison of two popular investment apps: M1 Finance vs Robinhood
This is a great opportunity to think through some of your “what if” scenarios and develop a financial plan that reflects your future needs and helps preserve your wealth. Planning your future financial path can be an exciting and rewarding process.
So, what are you going to do with your $50,000 windfall?
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein. NextGen Wealth LLC is registered as an investment adviser in the states of Missouri and Kansas, and is notice-filed in the State of Texas. As such, it may only transact business with residents of those states and residents of any other state where otherwise legally permitted subject to exemption or exclusion from registration requirements.
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