- 1) Set up an emergency fund. Set aside 3-6 months of your living expenses in highly liquid, accessible accounts (whether in a regular savings account at a bank, CDs, or part of an investment account), make sure it is easy to access and there aren’t restrictions (or are minimal restrictions) in the event you need to access it.
2) Pay down debt. Start by paying down the highest interest rate credit card or line of credit. Some people champion paying the smallest balance first which can work if you need to see instant gratification, but you will actually be better off-putting as much as you can toward the higher rate credit card first.
3) Save to your retirement plan. Whether an employer plan, 401(k), or an IRA, consider funding more if Uncle Sam will allow you. Check out our post on Account types: a tax perspective for a comparison of retirement and non-retirement accounts.
4) Pay extra toward your mortgage, car loan, or student loan.
5) Splurge on a nice meal out. Live a little and enjoy a nice meal if you have anything left over.
Generally speaking, my perspective on the concept of ‘sudden money’ – whether through game show winnings, lottery, bonus, or gift – is to plan for about 1/3 to go to the government in some form of taxes, immediately save 1/3, and then apply the remaining 1/3 to whatever your heart desires. For me, my extra often includes ‘more savings,’ but that’s just me. You didn’t have the money moments ago, so why spend it all? The only thing that spending it does is get you used to living a more expensive lifestyle than just moments before. It’s easy to go up the spending ladder, but it’s so much harder to come back down! If you receive unexpected money of a significant size (say if you find yourself with an inheritance of $50,000), then some more planning than the 1/3 method will be necessary to assess your goals.
AJ: A few years ago I could have thoughtlessly and effortlessly spent $1,000 in minutes, but after several much deserved vacations and long weekends, I would now prefer to save $1,000 for long enough to turn it into a few days of solitude. We regularly talk about the importance of saving as much as possible but we all need to indulge in number 5 every now and then to enjoy the fruits of our labor today instead of waiting for the slowly-approaching date of retirement.
As we have said before, look to maintain balance. If you find yourself in a position where you regularly have more than you hoped to save and have paid for all of your necessary expenses, do allow yourself a “live a little” moment every month, but do put some of that away for the greater, long-term good.
Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.