Spending down debt: What to do with a one-time windfall?
This post is part of a series on strategies you can adopt to free yourself from burdensome debt.
A big cash windfall may only come once in your lifetime. Perhaps it is an inheritance, a payout from a law suit or lottery winnings. But no matter what the source and the feelings associated with it, it represents a powerful one-time chance to get out from under a pile of debt.
In story after story about lottery winners, the first thing they want to do is pay off their loans. Not so fast. If you use all the cash to pay off credit cards, you may just run up the balances again. Two years later, you'll be right back where you started.
This cash infusion is your opportunity to invest for your future, start saving for retirement, or simply create the emergency fund you never had and always wished you did. A cash cushion can provide great financial security as the economy heads into a possible recession and you don't want to go through it too soon.
Let's imagine you inherited $25,000 and have a $150,000 mortgage, a $15,000 credit card balance, and $10,000 left on your car loan. Go ahead and pay off a big chunk of your credit card debt -- say $10,000 -- paying off (and then cutting up), the highest interest cards first.
But take that remaining $15,000 and lock it away. Put $8,000 in an S&P 500 Index fund in a retirement account. Open up a brokerage account with $4,000 and buy some shares of a blue chip stock (General Electric (NYSE: GE) or Cisco Systems (NASDAQ: CSCO) seem like good choices these days). That would still leave you with $3,000 in a savings account where you can feel secure knowing you have that to tap into should emergencies crop up.
With any luck, over the next year, the improvements to your financial outlook will continue -- even without an additional cash infusion. Perhaps you'll get so enamored of investing and you'll start allocating cash toward building up your account with more blue chip stocks. YOu can start to take the extra cash that was going to pay interest on that old high-interest card and use it to pay down your credit card balances even further.
Even if you never win the lottery, a one-time cash infusion is a thrilling opportunity to change your whole financial picture. Take advantage of the opportunity to do more than just pay down your credit cards. You can use the money to build a new, more secure financial future for yourself and your family.