“Impulsive decisions are soon regretted, so take your time with financial decisions.”
– Kate Phillips, Total Wealth Coaching
It’s the problem everyone wants to have: not knowing what to do with a large sum of money. Expected or unexpected, the result of an inheritance, business deal, or the sale of a company, home, or other property, there are some things you should know about the best ways to utilize a cash windfall.
Table Of Contents:
- First, be intentional.
- Second, use your head and your heart.
- Third, don’t be in a rush.
- Lastly, spend wisely.
- Here are 11 ideas to make the most of a lump sum.
- What will you do with your windfall?
First, be intentional.
Even if the windfall is more money than you ever thought you would have, if not managed intentionally and with care, you risk looking back one day (perhaps sooner than you think) with regret. Just google “lottery winners who lost it all” for examples of what not to do. (Better yet, read the eleven ideas below for putting the money to even better use.)
Secondly, use your head and your heart.
You want to make financially savvy decisions, so it’s important to remember that there’s more to money than simple math. Decisions are emotional as well as logical, and whatever you decide to do with it, make sure both your head and your heart are on board.
Third, don’t be in a rush.
If you’ve lived without the money until now, spending several weeks, a few months, or even longer to decide what to do with it could serve you well.
Lastly, spend wisely.
While that may sound subjective—and it is—think of it this way: spend your money in such a way that you’ll have few, if any, regrets. You could fritter the money away on impulsive consumer purchases and eat out every night for the next few months, yet you might feel like you’ve got “nothing to show for it” down the road. Instead, with the same dollars, you could have created a lasting income stream, honored your deepest values, or created memories to last a lifetime.
There’s a simple key to spending wisely: think long term. Even if you decide to spend the entire amount in the next six months, will you look back 20 years from now and feel you put the money to the best use? If the answer is no, go back to the drawing board.
What To Do With a Large Sum of Money – 11 Ideas
1. Free your income.
If you’re using your current income to pay off high-interest debt such as credit cards or other debt with double-digit interest rates, using some of your cash to decrease or eliminate that debt makes a lot of sense.
What could you be doing with your monthly cash flow if you didn’t have credit card payments? By paying them down, you’re reducing your burden of monthly payments and minimizing the associated opportunity costs, freeing you up for other, more lucrative, opportunities.
2. Create cash flow.
Unless you have more income than you know what to do with already, creating cash flow is an excellent idea. By putting your dollars to work for you, you’ll have more dollars in the future and more choices about how to spend them!
What’s the best financial strategy for creating cash flow? Private lending and rental real estate are a few examples of investments that have a monthly cash flow opportunity.
What if you have just $5,000, and you’d still like a little cash flow? We recommend peer lending, which allows you to lend as little as $25.00 to someone else who is looking for a loan. Websites such as Lending Club or Prosper make it easy for both lenders and borrowers to do business, removing banks as middlemen and increasing returns for those lending while decreasing interest rates for the borrower.
3. Put a down payment on a property.
While we encourage you to pursue homeownership and quit throwing money down the rent drain even if you have to use a small down payment, that doesn’t mean you can’t do better. If your cash windfall can get you to (or closer to) the 20% mark, you’ll be way ahead in the long run. And if you already own a home, it could be a fantastic opportunity to secure some rental property.
A healthy down payment can help you:
- Eliminate mortgage insurance: This is insurance for the mortgage company should you ever default on your mortgage. For you, it’s just money you’ll never see again.
- Expand your asset base: A down payment enables you to use a mortgage as leverage to purchase a larger asset. You can control a $500k asset with a $100k down payment.
- Strengthen your offer: Sellers and brokers tend to not take minimum down offers seriously if there are stronger offers on the table, due to concerns that the mortgage could fall through. Furthermore, the current housing market is extremely competitive almost everywhere, with some properties being sold within hours of being listed—sight unseen. Decent properties will probably have multiple bids, and a larger down payment can give you a competitive edge during the offer process.
4. Save for long-term growth.
If you aren’t reliant on immediate cash flow, and you’re looking to grow your legacy, we recommend considering high cash value life insurance. The cash value component of your insurance allows you to save at competitive rates, and the potential to earn dividends.
The hidden power of cash value insurance is leverage. The money is liquid through something called a policy loan. Your insurance company will lend you money, with your policy as collateral. If you’re wondering why you’d want to take a loan when you can just get the “real thing,” consider the power of compounding.
When you liquidate a savings account, you start from the bottom again. That money cannot earn interest, because you’ve used it. When you take a policy loan, your money remains where it is, earning interest and dividends. Meaning you can use your money AND benefit from compounding.
5. Increase your net worth.
Amazingly, life insurance isn’t just good for long-term, liquid growth. It’s also an increase in your Net Worth.
The best financial vehicle for increasing the worth of your estate instantly is life insurance. We recommend whole life insurance so that the increase in net worth is guaranteed, permanent, and easily transferable with no (or minimal) taxation.
We often receive questions from people who would like to purchase life insurance with a windfall. While it is possible to do that, life insurance is better designed for ongoing payments than large lump sums. Yes, there are single premium policies available, however, they have limited flexibility and minimal tax benefits due to something called a modified endowment contract (MEC).
We believe a better strategy for optimizing your net worth is to invest for cash flow, turn a lump sum into an income stream, then fund a long-term whole life policy with that income stream.
6. Start a business.
There’s no better way to create long-term prosperity than to have control over your income. One way to control your income is to own your own business. As Kate Phillips argues in “Why Entrepreneurs Rule the World,” conventional employment is actually riskier than owning a business because often, your entire income can be eliminated with the decision of one or two people.
Yet when you’re a business owner, you can have many clients and multiple streams of income. Even if you love your job and want to keep it for now, you can create wonderful tax write-offs by having a legitimate business on the side.
7. Take care of business.
Already have a business? You can be your own investor and increase your profitability and stability in many ways. Some ideas:
- invest in a coach or mentor
- expand your marketing
- improve your website
- increase your inventory
- hire new talent
- upgrade your technology
- purchase new equipment
- pay taxes (or set aside funds for future taxes)
Take care of your business, and your business will take care of you!
8. Make a difference.
What are you truly passionate about? Maybe it’s supporting your faith, solving world hunger, or caring for animals that were mistreated. A cash windfall is a fantastic opportunity to put your dollars where your values are.
The simplest way to do this is to make a donation. Even more impactful ways to make a difference could include making a sustainable donation (creating cash flow through an income-producing asset, then donating the income stream), and/or creating a legacy by including one or more charities as a beneficiary of your life insurance policy.
9. Fulfill a lifelong dream.
Assuming there are no strings attached to the windfall, you can use it for anything you want! Is there something you’ve always wanted to do, yet you’ve never had the financial capability to do it?
Perhaps you studied abroad in college, and you’d love to return for a month to visit the friends you made. Maybe you’ve always wanted to take a sabbatical to write a book, dive the Great Barrier Reef, attend spring training, or take your kids on a trek into the Grand Canyon.
One word of advice: you’ll likely be more satisfied with experiences rather than purchases, according to research on money and happiness. We tend to adapt to material purchases, which typically provide temporary satisfaction, while experiences can meet greater psychological desires and provide more lasting satisfaction, according to research from Dr. Thomas Gilovich of Cornell University.
10. Learn something new.
Spending money can help you have things. Money can also allow you to do things. And money can also help you be someone you’ve always wanted to be through expanding your skills, knowledge, and training.
Want to be adventurous? Learn to skydive or fly a plane. Want to be more creative? Take a painting class, cooking class, or music lessons. Opportunities to learn are everywhere through local classes, mentors, online courses, certification programs, and simply learning by doing.
A substantial cash windfall could even be an opportunity to go back to school and obtain a degree. Perhaps you work in construction, and you’d rather be the architect designing the buildings. Maybe you’ve become exceptionally talented at helping people solve personal problems as a hairdresser, and you’d rather get paid as a psychologist now.
11. Keep it!
There’s no rule that the money has to be spent on anything. If you’re someone who keeps “meaning to get around to saving up that emergency/opportunity fund”, this windfall just might be your shortcut!
While we generally recommend dividend paying whole life insurance as an ideal place to store cash, even before you build your cash-value account, you should have some savings to get you through “everyday emergencies” in a bank account, credit union, and/or in cash (stored safely in an easily accessible place).
As I explain in Busting the Financial Planning Lies, without savings, it can be very challenging to get ahead. Everything is “OK” only as long as everything is OK. When the car breaks down, the roof leaks, the dog needs a vet, or you have a surprise opportunity, such as the chance to join your friend in Maui for a week (and they’re paying the oceanfront hotel bill, you just have to cover airfare and spending money), that’s when we tend to use our credit cards and move backwards.
Having savings is the foundation upon which financial prosperity is built. So if you haven’t had a financial buffer or opportunity fund, it’s possible that the best way to spend your sudden cash is not to!
What Will You Do With Your Cash Windfall?
Still wondering what to do with a large sum of money and need to talk further? The team here at Prosperity Thinkers is here to help! Contact us today, and together we can get your dollars working harder for you.