What to Do With a Financial Windfall

Even if you only got a little bit lucky, it still pays to have a strategy.

rainbow with pot of gold at end
(Image credit: Getty Images)

It’s a cliché, but it’s also true: Every cloud really does have a silver lining. That was hammered home for me after I was recently rear-ended in a car accident. I wasn’t hurt, but it was a frightening experience, and the amount of paperwork required in its aftermath was sometimes overwhelming.

After I filed my claim and it was processed, my auto insurer deemed my car a total loss. But before I had time to mourn the fact that I was carless—again—the silver lining emerged: I was refunded part of my auto insurance premium for the month, and I was cut a check for $11,000, which was what my auto insurance company concluded my 2014 Chevy Cruze was worth. While the settlement wasn’t a Powerball, “quit my job” amount, it did give me pause, because I had to decide what to do with it.

Back to Basics

I knew I didn’t want to run out and lock myself into an auto loan for another car. With prices for new and used vehicles still crazy high, adding a car payment didn’t sit well with me—especially since my old car was paid off. Plus, the Washington, D.C. metro area has a public transit system that I had used consistently before I had a car. So I did what I’ve been meaning to do for a while: I added money to my emergency fund.

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You generally want to have at least three to six months’ worth of expenses stashed in a dedicated savings account in case of a job loss, medical emergency or costly car-repair bill. (Here's more on where to find emergency cash.) However, with inflation running at about 9%, you should stash more in the account.

Bulking up your savings by about 10% or more will give you more protection in the event of an emergency, says Samantha Gorelick, a certified financial planner with Brunch & Budget, a financial planning firm. You need to be prepared to cover your expenses at elevated prices if inflation continues, she says.

If you don’t have an emergency fund, an unexpected windfall is a good way to start one. Put your money to work by parking it an interest-bearing savings account. Rates are climbing for both savings and money market accounts at many financial institutions. (For current rates on top-yielding accounts, go to depositaccounts.com.)

Another personal finance basic to consider: Pay down any credit card debt you have. For those carrying a balance, using even a modest windfall to pay it down could put you on a better financial footing and potentially increase your credit score.

In my case, although my revolving balance is typically between $1,000 and $3,000 and my credit score gives me bragging rights, paying off some of that debt alleviated some financial anxiety. If you have balances on multiple credit cards, pay off the card with the highest interest rate first, and go from there.

If your debt is mostly tied up in student loans, consider using some or all of the money to pay down your loan balance. The moratorium on federal loan repayments has been extended through the end of the year, but it doesn’t include private student loans. Although the Biden administration is forgiving a portion of federal student loans, depending on the size of your loan you could still need to make repayments when the latest moratorium ends.

After you’ve taken care of your adulting needs—or if your finances were already in stellar shape—you could use your windfall to fund something fun, such as an excursion you’ve postponed because of the pandemic. If you’ve been dreaming of a European vacation, this is a great time to go, because the weak euro has offset the ordinarily high cost of traveling there.

Rivan V. Stinson
Ex-staff writer, Kiplinger's Personal Finance

Rivan joined Kiplinger on Leap Day 2016 as a reporter for Kiplinger's Personal Finance magazine. A Michigan native, she graduated from the University of Michigan in 2014 and from there freelanced as a local copy editor and proofreader, and served as a research assistant to a local Detroit journalist. Her work has been featured in the Ann Arbor Observer and Sage Business Researcher. She is currently assistant editor, personal finance at The Washington Post.