debt freedom

A Large Chunk of Money

by mike on January 2, 2010

With the holidays just getting over, there is a chance that you may have a large chunk of money that you are wondering how to spend or save.  The same situation might occur when you first get married (lots of cards stuffed full of money!), you receive an inheritance or get a bonus at work.  Often, it is difficult to decide what to do with the money because you want to utilize it in the best possible way.  This is the perfect situation to utilize the baby steps.

1.     $1,000 in the bank. The first step is to set aside $1,000 as a starter emergency fund.  The idea is to shield yourself from any small, unexpected expenses that may come up that isn’t covered by some sort of insurance.  An example may be a $500 car repair or a $300 furnace repair.  The point is to have a buffer between you and life happening so you aren’t forced to fall back on a credit card, your family, or the government.

2.     Bye, Bye Debt! After you put $1,000 in the bank, if you still have money left then it’s time to pay off any debt you may have, except for the house.  Credit cards, student loans, medical bills, personal loans, and vehicles are all on the chopping block.  List all of these debts smallest balance to largest balance and pay off the smallest first.  Then, move on down the line as far as your chunk of money will allow.

3.     Fully funded emergency fund. If either you have no debt or you are fortunate enough to have enough of a windfall to pay off all of your debt, then the next step is to beef up your original $1,000 emergency fund.  You want to put three to six months worth of expenses in savings as a fully funded emergency fund.  The point of this fund is to be able to pay your expenses if you lost your job and had no (or a lot less) income.

4.     Retirement. Hopefully, you get this far and still have money left over. If you have no debt and a $10,000-$15,000 in the bank, then your monthly budget should be freed up to start putting 15% of your income into retirement on a monthly basis.  If that is the case, then you need to start doing that and just move on to the next step with your windfall money.

5.     Kids’ College. If you are regularly saving for retirement, then the next step is to take a look at kids’ college.  If you have no kids, then you can obviously skip this step.  If you do have kids, then it’s time to start thinking about how to pay for their college.  Notice, I only bring this up after you are debt free, have a fully funded emergency fund, and are well on your way to saving for retirement.  There are many options to consider for saving for your kids’ college including ESA’s and 529’s.  I’ll discuss those in more detail in a future article.

6.     Pay off the mortgage. If you got a huge sum of money, then you may do the previous five things and still have money left.  The mortgage is next on the list.  Use everything you have left to put towards paying off the home mortgage.  Once that step is over, you are really on your way toward building lots and lots of wealth.

There are a few other things you may consider doing with the money as well.  You may decide to tithe on the money and give a tenth of it to your church or some other charity or giving.  This, by the way, is one of the most fun things to do with money.  Along the same thinking of fun, you may also decide to blow some of the money on something you wouldn’t normally do.  As long as the amount is within reason, then I say go ahead!  Have fun.  Finally, you may use it for some major savings goal you have (a home remodel or vacation for example).  This, however, would only be appropriate after step number 2 above.

The whole point to all of this is that you have a plan for the money.  It will work so much harder for you when you tell it what to do.  You can feel at peace knowing that you utilized the money well if you attack it with a plan.  Remember, your windfall should be a blessing, not something that causes regret and guilt.  E-mail me if you have any questions!

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