What to Do with a $100,000 Cash Windfall

man money in handsEveryone dreams of it – receiving a windfall of cash either from a long-lost relative, a winning lottery ticket, or through a will from a grandparent who thought the world of you.

For most of us, that day may never come. But for some, the arrival of a financial windfall can change life in a single moment. There are important fiscal decisions to be made and ways in which a windfall should be managed before it goes to waste.

Managing a large lump sum of money can be a daunting task. It pays to take a strategic, long-term view of how to spend and invest it. Consider the following ten ways to spend and save a financial windfall wisely.

How to Spend a Windfall of Money Wisely

1. Pay off “bad” debts like credit cards or non-deductible, high interest loans.
Let’s say you have credit card debt charging 15% interest. By paying off this balance, you are essentially receiving an instant 15% return on your money because you are no longer paying the finance charges. Use some of the windfall to pay off high-interest debt. Then, try to stay out of debt for good!

2. Start or add to an emergency fund.
Start an emergency fund of 6 to 12 months worth of expenses in cash. Sure, a credit card can act as a safety net, but cash doesn’t charge you an APR and will let you sleep easier at night. Keep the money in easily accessible accounts which earn interest, like an account at Capital One 360, Ally Bank, or similar.

3. Play catch-up with your retirement accounts.
Contribute a percentage of your windfall to your retirement accounts (i.e. 401k, Roth IRA, traditional IRA, or Roth 401k) to help ensure you’ll have enough money saved for retirement. In addition, some accounts will allow you to “catch up” and contribute additional funds if you are over 50 or did not take advantage of the maximum contribution limits in prior years.

4. If you have children, set up and contribute to college funds.
Use some of the money to start a 529 college savings plan. A 529 is a savings account designed specifically for college tuition that allows you to save money on a tax-deferred basis and even withdraw it tax-free if used for educational purposes.

5. Take care of home repairs.
Putting off a roof repair or a hot water heater issue can cost you a lot more down the road than what you save today. Use the money you recently acquired to protect and enhance your biggest investment – your home.

6. Pay down your mortgage.
Most financial advisors will tell you not to pay off a mortgage in full. They typically consider a mortgage to be “good debt” because the interest paid is a tax deduction. However, you might consider paying a little extra each month towards the overall loan. By adding to each month’s mortgage payment, you can pay off your mortgage years earlier than expected and save money on interest over the course of the loan. Alternatively, if you’re stuck in a relatively high interest rate loan because your mortgage is upside down, you could pay that mortgage down to an amount where you qualify to refinance at a lower rate.

7. Donate some of the money.
If you have a favorite charity or non-profit organization, they could surely use a cash donation. So why not help them out? They get the donation and you get the tax write-off; it’s a win-win for all. See the tax deductions for charitable contributions and donations for more information.

8. Pamper yourself within reason.
Take a vacation, go to the spa, or head to that expensive restaurant. Taking a little off the top of that windfall to pamper yourself and splurge can do a load of good for your psyche. Just make sure it’s only a little and don’t get into spending habits you can’t afford to maintain.

9. Don’t rush into spending your windfall.
Calm down and think rationally about your new situation. Taking a few weeks or months to contemplate the possibilities can go a long way towards making sure you do the right thing. Assess your priorities and determine which areas of your life could most benefit from extra funds.

10. Consult with a fee-only financial advisor.
If your windfall is a public event (e.g. the lottery) you will start getting calls, letters, and emails from people wanting to “advise” you. Don’t listen to them; tell them you already have someone and then find and choose a financial advisor on your own. Since you can afford to pay them, definitely choose a well-referenced, fee-only advisor.

windfall money man

Bad Examples of Money Management

So, there you have it: 10 ways to responsibly spend a financial windfall should one come your way. And if that doesn’t do the trick in motivating you to be responsible, below are some stories of people who won the lottery and then managed to lose it all. Here are a few things NOT to do with a windfall:

  • 16-year-old Callie Rogers won £1.9 million in a UK lottery and proceeded to waste her entire winnings on vacations, shopping, and breast implants. She now works a job to pay off the additional debts that she has accumulated. I guess that’s why you don’t give your kids a large allowance!
  • Willie Hurt, who won $3.1 million in the Michigan lottery, ended up getting divorced, losing custody of his children, and getting addicted to crack cocaine. Oh, and he was also charged with attempted murder.
  • When William Post won $16 million in the Pennsylvania lottery, his own brother hired someone to kill him so he could get his hands on the money.
  • Janite Lee won $18 million in the Missouri lottery, but gambled it all away and ended up having to file for Chapter 7 bankruptcy less than 10 years after winning.

Final Word

A financial windfall can be a gift if spent and managed wisely, or a curse if squandered or mismanaged. If you’ve recently come into money, take time to consider your blessing and what you’d like to accomplish with it.

What would you do with a surprise windfall? Do you know someone who received a large sum of money and managed it well?

  • http://www.lazymanandmoney.com Lazy Man and Money

    J.D. from Get Rich Slowly tackled this subject recently. There were approximately 17,000 comments (I’m exaggerating for effect).

    I fall on the opposite side of the coin with the paying off the mortgage. It has nothing really to do with the tax savings. As you mention, they are not THAT great, but they factor into the overall decision. I’ll number my thoughts below for easy reference.

    1. For a lot of people $100,000 wouldn’t pay off the mortgage completely. If used to pay off as much of that as possible, you run the risk of losing your job the next day, not being able to make the mortgage payments, and losing the home anyway. If invested, you’ll still have access to it. Even if you lose your job and the diversified portfolio drops 50% (pretty rare, especially if he was diversified internationally), you can use the rest of the sum of money to continue to make payments on the home and put food in your mouth. In this case, it’s actually far less risky to invest the money in my opinion.

    2. Some people are hung up on the “guarantee” of paying off the 5% (tax savings should shave at least a percentage on that original 6% mortgage). Invested over a 30 year mortgage, a return of better than 6% is very much guarenteed (if investing costs are kept down, and the investment is diversified, both things that the individual can control). The return is likely to be 8%, 10%, or in some cases, even 12% (see Vanguard S&P 500 performance since 1976 for evidence of this).

    In summary, the decision (as I see it) is basically between: Do I want 100% chance of a 5% return (by paying off the mortgage and foregoing the tax benefits) or do I want 99+% return of 8-10%? Using $100,000 to pay off a mortgage early (using the 5%) saves you $332K in interest over the 30 years, by my math – ((1.05^30)*100,000)-100,000. However, that 100,000 invested at only 8% would make you $900,000 – ((1.08^30)*100,000)-100,000. At 10% over 30 years, it’s 1.6M. That’s the difference of 3-4% interest accumulated over time. You have decided that the risk of removing mortgage debt from your life helps you sleep at night, which is awesome. I have decided that taking the 1% of risk is worth the $550,000-$1.3M dollars. Losing out on that much money and (potentially two additional homes paid in full) would keep me awake at night. I suppose this why they call it personal finance.

    I understand a lot of people might not have confidence in the stock market over the next 30 years. That’s a reasonable fear. However, if that’s the case, I hope those people are putting their 401k and Roth IRAs investments in a “100% guarenteed to not lose money” investment. Risking a whole retirement is a lot worse than risking a home in my opinion. I can always rent a place to small, cheap place live, but I’ve never seen someone rent a retirement.

    • Hppu

      The market has not returned anything close to 8 or 10% for the last twelve years nor is it likely to return to such numbers in the foreseeable future. By the time it does, if ever, inflation will kill most returns; the only way to beat this cycle is to take huge risks and just like Vegas, the odds favor the house.

  • erik.folgate

    Lazy Man,

    Thanks for commenting. I like fellow personal finance bloggers leaving comments. Your points are well taken. But, there are a few things that I was assuming that I did not convey in my article well enough.

    First, I should have used a number more like a million dollars. You’re right, $100,000 won’t pay off most people’s mortgage.

    Second, you are assuming that someone is going to take the entire 30 years to pay off their mortgage. I was not assuming this, so I was not looking at it with the vantage point of the 3 to 4% interest over 30 years. I was assuming that you would still aggressively be pursuing paying off the mortgage.

    Third, I did not bring up the point about where you are in your life. I am 25, so for me to pay off my mortgage now and not invest it for retirement is perfectly fine, because I have another 40 years to be investing for retirement. If you receive a windfall of money at age 55, then you are absolutely correct, after paying off credit card debt, put the money away for retirement.

    My point with this article is to get people thinking about how powerful their income would be without a mortgage payment. Imagine having an extra $1000 to $2500 per month to play with? You can save up a ton of cash over a long period of time when socking away this kind of monthly investment.

  • http://www.lazymanandmoney.com Lazy Man and Money

    First point – well taken. If you use 1 million though, that’s still $80,000 a year in interest. I would invest it for a few years and maybe after awhile decide to pay off my house. In the meantime, $80,000 a year is still a nice $6600+ a month. My point is that it doesn’t really matter if you change the numbers, making 8-10% is better than saving yourself 5%. If you make the numbers bigger, the difference is just more pronounced.

    Second point – This assumption is kind of my point. People should not aggressively be pursing paying off a mortgage. Saving 5% at the expense of 8 or 10% is huge over a lifetime.

    Third point – Being 25 is an even a bigger reason to not pay off the mortgage. The longer you can make 8-10% vs. saving 5% the better off you should be. If someone gave you 9 cents on every dollar under the condition that you had to pay 5 cents to someone else, you’d do that, right? You’d do it all day as much as you can. Because you are 25, you can effectively do this a lot more than most people.

    Fourth – I can imagine how great it would be to have an extra $1000 to $2500 to “play” with. That $100,000 invested will should make you around $750-800 a month. That same $100,000 only saves you $500 dollars in mortgage (the 5% number) – net gain is around $250-300 a month.

    Along similar lines, I know people that have student debt at 2% and they have no intentions to pay it off as long as they can make 5% in a high-interest savings account. They would be better off putting it in at 5% and then on their deathbed, transferring the money over to pay off the 2% debt. This is really not that different, except that the percents are somewhat different and the stock market is less guaranteed – though I argue very, very solid – over the long haul.

  • author

    Yeah, I guess it just comes down to personal preference. I can see your point about the mortgage. It doesn’t have to be your first priority or your second or third priority. As long as you don’t live in the slums, it will never go down in value, so paying it off isn’t a necessity.

    However, I would personally pay off my student loans as soon as possible. I just don’t understand why you’d rather make net 3% rather than making the full 5%. You and I may have a different view of paying off the debt. I am talking about going crazy and paying off the debt in a year to 18 months. Then, you can start getting more out of your money and never have to worry about a payment.

    The bottom line is that i hate payments. Maybe our agrument is different. I am thinking more along the lines of what is less risky. You are thinking more along the lines of what is more logical in a mathematical sense.

  • Jessie

    For either of you (Lazy Man or author): What if you are 68 years old and have bought a retirement home and hope to sell the previous home at a, possibly, minimum 200k advantage. Would you pay off your new mortgage or pay down on it and invest the rest to supplement your less than ideal retirement income? New morgage is about $1300 at 6%. Thanks.

    • Leeanne

      Pay off the mortgage. When you reach retirement and if you don’t have enough in savings, etc.?? You can opt for a “reverse mortgage” based on the equity of your home. In other words, you will be paying yourself (plus interest) and when you go to sell? It will be worth less because you have tapped into the equity to live off of. Just an idea, but talk to a certified financial advisor before you do anything….

  • Jessie

    Oops! Re my last comment/question. The 200k would not pay off my new mortgage, just most of it.

  • http://www.carthan.com Chuck


    It’s good to see someone who thinks like I do. I am allergic to debt. All Lazy Man has to do is set up his scenario in Quicken, with real data instead of made up data. He will easily see how the interest in a home takes away more of your spending power even if you have investment. Your net worth takes too long to get over the hump. You spend too much time working for the banker than for yourself, and after the dust settles you only end up with 30 cents on the dollar, depending on your tax bracket.
    You are right to get rid of the debt. Get rid of the debt and keep that money for yourself and your family! Let’s look at my scenario. $192,000 in debt @ 5.25% Schwab One gives me only .01%, the credit union, .1% & .4% for savings. The bank on the other hand is taking 5.25% on a very large sum of money. That means for every $1063 I send them, they pocket $840 and only pay my debt down with $263 adding a dollar on to that every month! I actually send them $1542 a month. The rest is escrow. That makes no sense to me Erick.
    Now, if Mr. Lazy Man could show me how I could have $192,000 in two places and show me a vehicle where I could get more than 5.25%, then I might listen to him, but as far as me and my house, I will aggressively seek to pay down this mortgage and get rid of the debt. I will always have money in my pocket if I have no bills!
    Debt is debt. There’s no such thing as a good debt. All I can say is, anyone advocating that you stay in debt must obviously be working for the banks! LOL!
    Spell bank backwards and you get knab. Too close to nab. That means to snatch or steal from somebody. When I pay off my debt, in quicken my debt goes down, my equity goes up, my net worth increases and goes up as well! Stay on track.

  • little late dear

    This is interesting. I have just today received that exact windfall of 100000. I also have a disease that quite potentially will kill me in the next 5 to 10 years. Everyone talks about saving for retirement but I have to assume I won’t make it to retirement and so I need better advice. Obviously I want to pay off credit card debt, and then do i plunk the rest on my mortgage? Or invest it in a short term thing that I can roll over? It would take 220000 to fully pay off my mortgage. I am thinking that I could drop down my mortgage payment from 1400 to about 700? The extra 700 a month would be good but not fantastic. If I pay off my two cars at a total of 18000 I would have an extra 700 a month and 80000 left over. So, that to me sounds like a better deal. Then plunk 20000 onto my personal debt and free up another 400 bucks a month. If I stuffed that 675 + 400 in a tax free savings account in one year I would have gotten about 12000 saved up again to add to the pot. Then I get nervous and don’t want to spend any of it. Help!

    • JFK

      First off, I hope you’re still around now to read this. Second, I commend you for being responsible, and I’m very sorry you’re dealing with serious illness. As you get sicker you will need care and the hospital WILL put a lien against you if you run up a big bill. Best thing for you to do – and I know it’s a little late now to recommend this – take that moolah and grab the people you love most in the world, and take them someplace wonderful, and make happy memories with them!!! If your time is short, the LAST thing you should be worrying about is bills! Spend every dime while you’re still healthy enough to enjoy it. It’s okay to be broke – if you’re near death, you’ll qualify for Medicaid or Medicare if it’s kidney disease. You’ll get the same end-of-life care you’d get if you were paying cash. Just make sure to sever legal ties with your loved ones before you get too sick. That way, when you die, there’s nobody to go after to settle the bill. Screw the hospitals! Eight hundred dollars for an aspirin? Why?
      Good luck, and I hope you take my advice in the spirit in which it was given. Life is TOO SHORT to worry about bills if you know you’re not here for the long haul! Best of luck to you!

  • Anonymous

    Both my parents passed away about 9 years ago. My inheritance was put in Vanguard where I managed asset allocation investments until a year ago when I retired at the age of 58. Because of the crash in 2008/2009, I did not make as much as I thought I would, but I still managed to make a long term profit of about 16%. Right after I retired, I sold all these investments and then transferred all the money into a discount broker. For over a year, we have been living off stock/fund dividends and make enough to live on and not have to take any money out of my IRA (it is large now since I transferred my work 401K into my relatively small IRA at Vanguard). My brother and sister got the same amount of inheritance as me. My brother just kept it in cash, but my sister put it in real estate and pretty much lost the bulk of her inheritance. What I have learned, since all of this happened, is to carefully save/invest a windfall if you are reasonably healthy. However, if you are not very healthy and/or have a lot of debt over your head, I agree that the windfall should be applied to the medical/personal debt first. By all means, don’t gamble with a windfall.

  • ~Leeanne

    Don’t forget that unless it is an insurance settlement, you need to save part of the $$$ to pay “Uncle Sam” the taxes that you owe on the money itself. Count on paying at least 25% for Federal and whatever you state % is for income tax or inheritance tax. Frankly, if you can pay off your mortgage?? Do it! Wouldn’t you rather have “peace of mind” instead of a tax write off on the interest of a mortgage payment? You save thousands over the lifetime of the loan by paying it off early which is more savings long term than just on the interest alone. Always think “long term” security first. The security of owning your own home outright, especially in bad economic times whereas people are losing homes/jobs everyday far outweighs any other alternative. One less bill to worry about and you will always rest knowing that you have a roof over your head that is yours!

    • JFK

      I agree. Shedding a mortgage is like lifting a crushing boulder off your chest.

  • Mikemoon

    If you win a multi million dollar lottery, you will be taxes 30% before you collect, and then around another 10%(both fed and state taxes again) (depending on the state you live in)after the first of the next year.
    Also remember you can only give $14,500 to anyone without them being taxed on any more money you give them per year. The Fed punishes generosity over $14,500 per year. It needs the money more than your loved ones(no matter how poor they may be), and knows what to do with it better than you do(lobbyist).
    Also remember that any amount over 5 million total to everyone(combined) you give money too, they will have to pay about 65% taxes on that money. With you being taxed at about 40% and the people you give money too at another 65%, now you understand why States push the lottery so much.
    Some of the taxes will be medicare, social security (the first 160K anyway, very soon to go up to save SS), etc…

    Also remember that only about 8% of all lottery money is paid out in winnings(2 to 4% of those people don’t bother to collect), then almost half of that is taxed away back to the Fed and states.

    • Localguy

      If you take the lump sum in a lottery, the tax will be the highest marginal rate for the feds but not everyone lives in a state that taxes income. Also, Social Security and Medicare do not tax lottery winnings but most of your post shows you didn’t read the article as it asked about a $100k windfall, perhaps lottery or in a will where estate taxes exempt far more than that much (it is not a gift if left to you by a deceased family member).

      But most lotteries are set by statute to pay out about 50% of the money coming in, not 8% (look it up), the feds then taking their share and states that tax income grabbing theirs should you win big in a lottery. Move to one of the non-taxing states and set up residency before claiming the prize if you win big and follow the other advice as it applies.

      • Mikemoon

        Only 8 states out of 50 do not have a income tax!
        When paying tax on your lottery winnings, there is a 25% Federal up front tax, and in my case a 5%(state) as well. There is also a back end tax of almost 10%(9.6%), depending on what state you live in. Most states pay/tax well over 5%, but there are a couple that pay/tax less, besides the 8 states that don’t have any. If you share more than 5 million dollars with friends or family, there is a health insurance tax(thanks to Obama) put on the money over 5 million shared(not you, but the money over 5 Million given out. This is new and just started in the last year or so).You maybe paying up to about 65% in your winnings. Canada, Australia, & the European Fat one(one billion euro’s), there is Zero income taxes of any kind!
        No matter what, there is a gift tax on giving anyone more than about $14,500 in one year, “”EVEN A FAMILY MEMBER””!!! Again, you can thank Obama!

        Moving to another state isn’t going to help you, as the tax rate is on where you bought the ticket, and even in some .
        states you would be tax by both state tax rates. I’am very clear on this. ..and more importantly, so are they.
        I have looked into many sources and this is what they say

        I will double check the pay out rate, but with unclaimed tickets, I could have sworn it was less than 8%. ..but it never hurts to double check again.

  • Localguy

    But Mikemoon, if you investigate different state lotteries, you’ll find some states like Texas, 63 percent is paid out in prizes, but the data shows about 65% of revenue goes into prizes for most states, the data freely available. Then, some states exempt lottery winnings from their state taxes if you are a resident, every state having different rules for residents and non-residents (it used to be that non-residents got all of it refunded, now some charge them even more, but there is no set policy for all states) but estate taxes when you die would leave the $100k from the original article untouched by the feds.