The 7 steps you NEED to take to set your family up for success
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Well hot damn! You have got a fat amount of cash burning a hole in your pocket! It’s time to go and paaaarty! … Hold it sister! You need to slow down and think about this stack of money, think about all the things that this money could do for you and your family! Yes, you can think about vacations and a new iPhone, but wouldn’t it be great if this money could benefit you not only today but every single day from here on out? Take this money and use it wisely, use it to help you in the long term. Because this cash windfall could set you up for success for a long time. This is security for you and your children, which is what you really want right?
Do you actually have the money?
Just because you are going to get a lot of money, it doesn’t mean that you go out and spend it today! You never know how long it may be until the cash windfall clears your account, you certainly don’t want to put a large purchase on your credit card now and then not have the money for months and months to pay for it (hello high-interest rate).
Besides the amount that you think you may get, may not be what you get. It would totally stink if you thought you were getting $3,000 from a tax return (that’s what you got last year and nothing changed since then). Oh, but things do change! This year you are only getting $1,200 back. If you had already spent $2,500 in anticipation of getting $3K then you are in for a world of hurt!
So don’t buy anything until you have the money in your bank account. Just don’t.
Where did the cash windfall come from?
You may not think that this matters, but it does! The sheer joy of getting a lump sum of money can cause so many emotions that can override other, more subtle feelings. It’s definitely worth it to take the time to pause and reflect.
Money from an inheritance
If the money has come from an inheritance due to the passing of a loved one, there are a lot of factors that come into play. Your emotions will go through a lot of changes; sadness at the loved ones passing, overwhelm at thinking of everything that needs to be done, relief knowing that money will be coming, guilt from thinking about the money, sadness again and again.
Financial experts agree, that if you receive a large amount of money from an inheritance that you take at least six months and do nothing with the money. Let your emotions settle, think of all the things that you would like to do with the money, and let those thoughts turn over in your brain for a time. How many times have you done something and then regretted it later? If you’re human, like me, then you’ve probably done this a lot. Waiting is key to being thoughtful and doing the smartest thing.
Money from a tax return
Whew! You didn’t owe anything, you didn’t think you would, but it’s still a worry for people. It’s funny how people view tax returns, if you owe then you’re silly for not planning accurately. If you got money back, then you’re silly for giving the government an interest-free loan over the year. There’s some truth to this last one, but it all depends on how you use the return. If you blow it all on wants (vs. needs), then it’s kind of silly. Yet, if this lump sum helps you achieve your long term goals then maybe this was a good strategic move. My husband and I get money back on purpose for a specific reason, more on this a little later.
Money from a job severance or severe injury
Firstly, I’m so sorry that this has happened to you. Either of these scenarios are scary and can be depressing. I urge you to take time to mourn the change, don’t hide from feeling. Feel all the feels, let your brain and heart process what has happened, and then pick yourself up, and get back in the game! Yes, you have every right to feel sorry for yourself! This can take a day, to a few weeks, maybe even a month depending on the level of loss. Get help, and get on with your life. I know, easy to say but hard to do. Yet it’s necessary.
I want you to hold onto this money! Don’t spend it on anything other than necessities, i.e., rent/mortgage, utilities, groceries, gas for your car. You need to make this cash windfall LAST AS LONG AS POSSIBLE. You never know what the future may hold, so don’t tempt fate to kick you while you’re down. If you were in an accident, it might take months for all the aches and pains to develop. Or getting a comparable job could take a long time due to possible economy changes.
Okay, so you have the money in your bank account, and you’ve processed all the feelings and such. What now? Well, depending on your situation you have a couple of options that are very smart and strategic. Use this cash windfall to the fullest potential and it can set you up for a long time!
The steps that smart people take with their money
1. Slow down
It is natural to be excited about coming into a cash windfall and depending on the size of that chunk-o-change you should SLOW DOWN on doing & saying anything to anyone.
If it’s just a small amount (less than $5K or so) then you can go about your business working through the steps. If it’s over $20K then maybe you need to seek some official advice. Now I don’t mean asking your brother for his advice. In fact, I mean the exact opposite. I hate to say this, but you should keep these cards close to you. When people talk about getting money it attracts attention, and that’s not always good. Ya know what I mean?
In regards to official advice, you may want to talk to a lawyer or a certified financial planner. This would be the smart thing to do.
2. An emergency fund
This piece of advice isn’t the most glamorous, or sexy, but there’s a reason that expert after expert recommends this step! late last year, Marketwatch reported on the Economic Well-Being of U.S. Households report (source)
“…where 4 in 10 US adults couldn’t cover a $400 emergency if it came up. That means it’s going on the credit card to rack up interest, costing you a lot more in the long run.”
That’s scary and sad. Let’s make sure that you’ve got the possible emergencies covered. It’s such a relief to know that if something terrible happened that my family would be okay. We wouldn’t need to sell anything, nor borrow to cover the cost. Seriously, it’s a HUGE comfort to me personally.
Many people want to know how much to put in their emergency fund, and the traditional advice is six months of living expenses, while some say 3-6 months, and others a year. It all depends on your emergency. In most cases people have this fund in case they lose a job, sustain a medical need that leaves them unable to work, etc. It’s important to decide with your spouse what is and what isn’t an emergency. For example, new tires for your car are not an emergency; as you knew you’d need new tires at some point so you should have been planning. For my family, we only touch that money if it’s a loss of a job or significant medical expense that insurance won’t cover.
I’m not saying that you should drop everything into your emergency fund, but put a decent chunk in there, say 50% of whatever money you came into.
One of the great things about having an Ally savings account for our Emergency Fund is that it earns a MUCH HIGHER interest there than it would at our regular bank. Every day banks typically offer horrible interest rates on savings accounts, like .08% APY, while some even go as low as .01%. While Ally is now offering 2.2% (as of March 2019), yet this could change at any time).
For example, if you had a $30,000 emergency fund. In one year at a regular bank with a savings account of .08% APY you’d earn $24. While at Ally, with 2.20% you’d earn $660.
Ally bank is so consistent with their returns, service, and features that Money Magazine rated them the Best Online Bank of 2018 (source) Oh, and $0 service fees on both checking and savings accounts.
3. Spend some on whatever you want!
Yup, you heard me! You should take 5% of the cash windfall and spend it on whatever you want to, a spa day, a new game console, a trip to swim park, whatever. Go have fun!
Deprivation is a sure-fire way to burn out and just give up and quit. You need to be responsible with your money, but you also need to live (just a little!).
Caveat: If you have been known to be a little splurgy splurge in the past you really need to EXTRA planful with this. Because this is the spot that most people will get tripped up on. This is not the time to buy your niece’s dog a diamond collar. Everyone seems to think the money will last forever, it won’t. Don’t be stupid like these celebrities that filed for bankruptcy! Their cash windfall didn’t help them at all, in fact, it ruined them. I repeat…
Don’t be stupid!
4. Attack high-interest debt like a ninja
If you have your emergency fund covered, then you should focus on paying off any high-interest rate debt next, such as credit cards. Interest rates can kill you, albeit a slow and quiet death, but just as painful. You see, it was so painful, and so many Americans didn’t even realize they were dying, that the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 was signed in by President Obama.
There were 12 primary protections, but today lets talk just interest rates. Now credit card companies have to tell you how long it would take to pay off your card, and how much interest you would accrue if you only paid the minimum payment. Apparently, we weren’t paying that much attention to interest rates.
For example, my family’s last cc bill was for $2,600. If I made only the minimum payment, it would take us 17 years to pay it off, with a 15.9% APR. OMG! That $2,600 bill would end up costing us $5,585, that’s crazy!
Pay off your debt, and pay it off now.
5. Set up your sinking funds
You have your emergency fund, and you’ve gotten rid of high-interest debt! Boo-yah! It’s time to save some $$$. I honestly think that sinking fund accounts have been the saving grace of my family’s finances! They are what I base all my other budget items around, and will continue to do it this way because it 100% works!
In a nutshell, you are saving money for specific, yet now unknown purchases. For example, we have a house fund, a car fund, and a vacation fund. We put money into these accounts every month, and then when we have a car repair, or need to get new tires the money is already there. If you want to see exactly how we pay for everything with sinking funds then check out the post below…
RELATED: The Smartest Strategy to Saving Huge Stacks of Money
Now you don’t need to fully fund these accounts either. You just need to set up the checking accounts and deposit enough money to give them a good base to start from.
6. Tackle low-interest debt
Due to a lot of planning and strategic spending, this is where my family is right now. We have zero debt (besides our house), and our sinking funds have a good amount of cushion. So we can now focus on our future, paying off low-interest debt and saving for retirement. These two options can run congruently, side by side, as you will be focusing on these financial goals for a long time coming.
For our family’s taxes, we plan it so that we get money back every year. We do this specifically so we can make an extra mortgage payment, yes a principal only additional payment. I am a fiend for mortgage payoff calculators, and it kills me to see our home loan initial purchase price, and then to figure out how much extra in interest we are paying for it! I sure don’t want to pay $200,000 extra for something, do you? Nope, I didn’t think so. So we take any large amounts that come our way and we make an extra payment.
7. Save for the future
We also contribute to our workplace 401(k) ‘s and my IRA, additionally, we contribute to our daughter’s ABLE account, which is similar to a college savings account, yet it’s for children with disabilities. A good rule of thumb is to be saving about 15% into these accounts, but don’t worry you can start at 5% and slowly work your way up.
Regarding higher education, it’s amazingly disheartening that as a society we place so much importance on higher education, yet we make it ridiculously expensive, which makes it out of reach for most students. In order to get a degree, they burden themselves with crippling debt.
According to Student Loan Hero “Among the Class of 2018, 69% of college students took out student loans, and they graduated with an average debt of $29,800, including both private and federal debt. You’ve probably heard another scary statistic: Americans owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. That’s about $521 billion more than the total U.S. credit card debt.”
As parents, we want the very best for our children, so I feel if we are in a position to save them decades of debt and stress, then I absolutely want to do that. This doesn’t mean that my daughter will get a free ride and have zero financial responsibility, she will have to pay some of her way, but I don’t want her to get an ulcer from the financial strain.
At the end of the day
All of these financial steps could be used for everyday earnings, not just a cash windfall. In fact, these are the steps that my husband and I took a little over five years ago. We started out $17K in debt, but we worked, and thoughtfully planned our way out of the hole we were in. We thought of scenario A, B, and C, which would take us farther or faster.
Whatever choices you make, I want you to be sure that you have considered all your options and even thought about the opportunity cost of spending your money on certain things. Opportunity cost being, if I spent my money on X, then that means I can’t spend it on Y, and it will impact us in this specific way.
Thank the heavens for your good fortune, or thank yourselves for your hard work, and now start the exciting part of thinking of all the possibilities! Have fun!
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