Q: Recently my wife’s great uncle died and left us some money we weren’t expecting. At first, we thought of all the things we could buy for our own enjoyment. Then, we settled down and started thinking about how to spend the windfall wisely.
A few ideas we came up with were to apply the total windfall to our home mortgage, pay off a couple of credit card debts, or invest in mutual funds to make the money work for us. My wife and I are waffling over what’s the best way to spend this windfall. Can you help us to figure out how to spend a windfall?
A: Congratulations on coming up with three smart ideas about how to best spend the unexpected windfall. You should consider many different issues before making your final decision about what to do with the windfall.
Consider these points when considering how to spend a windfall:
If you’re within 5-10 years of retiring and the money would actually pay off your mortgage or ensure you’d successfully pay off the mortgage before you retire, applying the dollars in that direction might be an excellent plan for it, giving you greater financial freedom during retirement.
On the other hand, if you’re more than 10 years from retiring and you have credit card bills with high balances, it would likely be wiser to pay them off instead of the mortgage, especially if your credit cards have higher interest rates than your mortgage.
It’s usually best to pay off the debt with the highest interest rate to avoid wasting any more of your future dollars.
In the event you can invest the money where your expected return is higher than the interest rate of your debts (mortgage or credit cards), then investing the windfall would make you come out ahead in the future.
You have the power to make a lasting and positive impact on your finances because of the windfall. Embrace this wonderful financial opportunity by making a smart decision.