3 Steps to Figuring Out What to Do With a Lump Sum of Money

lump sum of moneyReceiving a lump sum of money can be both exhilarating and scary all at the same time.

You know you have a big opportunity to make the money matter.  Yet you are fearful that you will make a mistake in what you do with the money.

I would consider a lump sum anything that is over what one paycheck would be for you.

Not to worry there are some steps you can take to ensure that you make smart money moves with any lump sum of money.

Don’t Rush

The number one most important thing to do when you get a large sum of money is to wait.
Yes that is right – wait.

Your emotions will be running high and that is the worst time to make financial decisions.  This is true whether you got the money from a sad occasion such as a death or a good occasion such as winning the money.

When dealing with a sad occasion give yourself at least two months. If it is due to the death of a spouse, child or parent you may want to wait up to a year.

With happy occasions you could wait a weekend to a few months. Make sure your excitement has calmed down. 
Put the money in a savings account until you have taken time to process your emotions.
The only time you want to skip the waiting period is if you are in deep financial trouble, such as about to lose your home. 
Then take only what you need to pay off your past due debts, and save the rest for later.  It is especially important to take time if you do have financial problems. The extra emotions from financial trouble paired with the emotions from receiving a lump sum can make for mistakes.

Create a List or Budget

Regret number one is not using the money for things that will help you get ahead in life. Such as paying off debt or investing the money for retirement.
To avoid future regret you will want to make sure that you don’t spend it on things you don’t want.
To do this the first thing you should do is create a list of everything that you would want to buy or do with the money.
Include everything from buying new furniture, paying extra on house mortgage, and vacation. Do not leave anything off this list. Don’t worry about putting too many things on it. Later we will worry about the money side.

If your lump sum of money comes from the death of a spouse and you need the money to cover expenses you need to create a budget instead.

This will help you determine how you need to invest the money so that you can pay for your daily expenses.
**** Depending on how you got the lump sum of money you may need to set aside some of it for taxes.  Talk to a CPA or tax preparer to help figure this out.******

Prioritize Your Wants

Now it is time to figure out which of your items you are going to use the money on.
Review your list of things that you want to do with the money and rank them.  Use one to be your top priority, and continue to order them until you are done.
Remember this is a great time to give yourself a leg up on bigger goals such as retirement and debt reduction. So if you are trying to decide between new couch as number one or pay off credit cards as number one ask yourself the following question. “Where will this get me in 5 years?”
If the money is needed for living expenses do the following.
Take the amount you need each month and estimate how long you will need that.  For example if you need the money until the kids are on their own in five years, and need $2,000 a month. Then you will need a total of $120,000. 
If you have enough to cover this amount, then make sure you put that money in a safe place for access. Preferably a money market or savings account.  Especially if it is 5 years or less. Now is not the time to “beat the market.”
Remember that you are counting on the money and do not need to take any risks. (More advice on where to save your money)
If you need the money longer than five years, you may need to get the money invested. Work with a reputable investment person for this. There are many options to consider depending on your needs. 
If you don’t have enough funds to cover your expenses, then sit down and determine how long you can go. Then create a plan for what to do after the money has run out.



You will want to be extra cautious of fraud.  Sadly there are people who would love to relieve you of this money.  Keep these in mind as possible red flags:

  • Unsolicited calls – Instead of using a planner who cold calls you, get recommendations from trusted friends and family.  Then interview them and check for recommendations from their other clients.
  • Quick Profits – if someone is telling you they can make money quickly for you – run!
  • Guaranteed returns – it is difficult to guarantee returns, especially high ones.  Most investments don’t come with a guarantee, and the ones that do such as insurance products come with a trade off.  That trade off is usually lower than market returns.
  • High pressure – anyone who wants what is best for you will allow you the time and space to make the right decisions for you.  You do not need to act quickly or miss out on the deal of a lifetime.

Once you decide begin to carry out your plans.  By taking extra time and assessing what you need to do with the money, you are sure to not make a mistake!

KYD says August 17, 2012

At some point in our lives, we ponder the question, “What would you do if you were given a large sum of money?” We usually answer the question with a bunch of wishful thoughts like traveling around the world or buying a boat. We don’t like thinking about being responsible with a large sum of money. I think this is because many of us never think that we’ll ever run into a windfall of money. However, it could be more feasible than you think. Baby Boomers were a very successful generation, and as they pass away, their children will inherit large sums of money and assets. Many people feel burdened with the responsibility of managing the money, so here is a list of things to do with the money that you won’t regret. We can do loads of things like, paying off debt, fully funding an emergency fund, investing for retirement, setting up College funds for the kids and so on…It basically depends upon the person and her perspectives..

RH says November 19, 2012

Great info & tips!
I also like the definition of what a “lump sum” would be; it doesn’t always have to be millions to be considered significant. Very helpful, thanks!

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