Stacks of coins in dirt with sprouts coming out of them.

What to do With a Windfall

By Dr. Barbara O’Neill, Financial Management Specialist, Rutgers Cooperative Extension

It is very common for people to receive extra income during tax season. Almost 83% of tax filers in 2016 received refunds and the average refund was $3,120. Other types of cash windfalls include gifts, inheritances, settlements, contest prizes, lottery winnings, and life insurance proceeds.

How should a cash windfall be used? Like most financial planning questions, the best answer is “it depends.” Some key factors include a person’s age, income, financial goals, net worth, cash flow, and amount of existing savings and investments.

Let’s assume that you will receive a $2,000 tax refund. You plan to spend $500 and use the remaining $1,500 to save, invest, and/or better your financial situation. Below are eight suggestions for using a cash windfall.

  • Fund an Emergency Reserve- Set aside money to provide ready cash when “stuff happens” in life (e.g., a sick child or car repairs). Three to six months of expenses is recommended ($6,000 to $12,000 if expenses are $2,000 per month), but any savings is better than none. For liquidity (i.e., no loss of value if money is withdrawn), put this money in an accessible place, such as a money market fund or savings account.
  • Reduce Debt- Repay the outstanding balance on high-interest loans or credit cards. To save the most money, start with debts that charge the highest interest. For example, many department store credit cards charge interest rates of 20%-plus. Paying off a 22% annual percentage rate (APR) credit card is like earning a 22% investment return: guaranteed, risk-free, and tax-free. PowerPay can help you create a debt repayment plan.
  • Invest for Retirement- Put your cash windfall in a Roth or traditional individual retirement account (IRA). Traditional IRAs may be tax-deductible in the year that a contribution is made while Roth IRAs are funded with after-tax dollars and earnings and withdrawals are generally tax-free. Taxpayers have until the tax filing deadline of the following year to fund an IRA for the previous tax year. 
  • Invest in Yourself- Build your “human capital.” This is what economists call workers’ knowledge, degrees, experiences, and skill sets and a cash windfall can be used to maintain or improve it. Examples include paying for credits for a college degree program and taking courses or going to conferences for career advancement. 
  • Invest in a Child-Add to the college fund of a child or student. Depending on the type of investment that you make, you may be able to save on federal and/or state income taxes. 
  • Remodel Your Home- Consider using a cash windfall to make a small home renovation such as new carpeting, flooring, or bathroom fixtures if you plan to stay put for a while. If you plan to move soon, use the money for cosmetic changes that will increase your home’s resale value (e.g., new doors and landscaping).
  • Open a Mutual Fund Account- Consider a mutual fund for broad diversification and professional management of the fund’s investment portfolio. Many mutual funds allow investors to open an account for $1,000 to $3,000 (or less) with $25 to $100 subsequent minimum deposits.
  • See a Financial Advisor- Go prepared for an appointment with a list of questions and copies of relevant documents (e.g., copy of tax return) to save time (and, therefore, money). Windfalls can be well spent by seeing a financial advisor to get answers to your questions and direction for the future. Many financial planners charge hourly rates like lawyers do and some work exclusively with middle-income households.

Consider combining two or more of the ideas listed above. For example, 40% emergency fund, 30% home improvement, and 30% debt reduction. It is also perfectly fine to take your time to decide what to do with a cash windfall. Simply “park” this money in a money market fund or bank savings account until you develop a plan.

In summary, an extra $1,500 or $2,000 or so is certainly not enough to quit a job for, but it is enough to provide significant financial benefits. Whether you choose to invest this money in your home or yourself or a child or a mutual fund, carefully spend any extra cash that you receive. A cash windfall is a wonderful gift. Use it wisely.

Are you trying to save money? Let Military Saves help you reach your savings and debt reduction goals. It all starts when you make a commitment to yourself to save. We'll keep you motivated with information, advice, tips, and reminders to help you reach your savings goal. Think of us as your own personal support system.


Getting some extra $$$ this tax season? @moneytalk1 has great ideas on how to use it toward savings goals >> @MilitarySaves

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