Did you know the average American household has over $137,000 in debt?
It’s no wonder that if a person receives unexpected money they want to figure out how to get rid of their debt but still have extra money.
Did you receive a big inheritance or get a big bonus? Don’t waste it!
Keep reading for the motivation to save money when you’ve hit it big.
Getting the Motivation to Save Money
Everyone can use extra money because, while money isn’t everything, it’s needed to keep a roof over our heads and food in our bellies. Receiving a big bonus, winning the lottery, earning a raise or getting an inheritance means your life can become a bit easier financially. The motivation to save money in these circumstances is when you realize how much it can benefit you.
Financial Goals and Plan
No matter how skilled you are at managing your money, you want to take the time to develop a financial plan. Take time out and be honest with yourself.
Identify bad financial habits that have not helped you in the past. Avoid making these mistakes again whether you have a new inheritance or the results of the lottery left you with tons of money. The main goal is to not randomly spend your new found money—you want to make the best out of it to enjoy it.
Outstanding debt includes credit card payments, mortgage, and student loans. Take a look at the interest rates for all of your current debts and figure out which ones have the highest rates. You will want to save money in the long run by paying off the debts with the highest interest rates.
There might be some instances that your monthly payment might be paying all interest and nothing towards your actual debt. These are the first debts you want to tackle.
If you’re paying no interest or extremely little interest on certain debts, then you might consider investing some of the money short term before tackling that specific debt.
Make sure to take time out to fund your emergency account or create one with your extra money. Emergency accounts should have a minimum of six months worth of living expenses that you can touch in case of an emergency. You might want to fund the emergency account and give yourself peace of mind before doing anything else with the money—even before tackling debt.
Setting up and having an emergency fund will keep you out of debt. If there’s an emergency, you will have the money to pay for it vs putting the emergency on a credit card and owing money.
Try to keep your emergency money in an account that’s more difficult to access. You can open a separate checking account in a credit union or bank to still be able to access it in case of an emergency. You can also keep it in a certificate of deposit or a savings bond, but it’s not as easily accessible as a bank or a credit union.
Plan for Retirement
Something to think about when you earn a raise or an inheritance is your 401(k) contribution. Putting the money towards retirement into a 401(k) is a smart way to save money because it’s all pre-tax.
If you have an employer that matches your retirement money if you contribute a certain amount, make sure to take advantage of this by increasing your contribution. If you don’t do this then you are essentially losing out on free money.
It’s a good idea to talk to an investing pro to learn about the best options for investing money towards retirement. There are 401(k) options and also Roth IRAs which can grow tax-free and can be used tax-free after retirement. To figure out which one is best for you with your newfound money, make sure you talk to a pro about it.
Have Some Fun
It’s ok to treat yourself. If you received an unexpected inheritance, buy a bottle of champagne and toast your benefactor. After your toast to say thank you, don’t go on a spending spree because you will regret it.
Whatever your definition of fun is, whether it’s a vacation or a shopping spree, write it down as part of your financial plan to revisit later, and see if it’s worth it to you to spend your fun money on that. You’ll be surprised how quickly you might change your mind and choose another option.
Whatever option you choose, make sure it’s a one-time fun purchase instead of increasing future bills. For example, instead of getting into a higher car payment which will affect your future finances, go for a one time option such as buying tickets to a concert or a cruise.
If you’re not sure how much to set aside as your fun money, 5-10% after-tax money is appropriate. Depending on how much your newfound money is, this can be equivalent to a brand new phone upgrade, a nice vacation, or paying for your next new car with cash.
Don’t Spend It All at Once
The last thing you want to do is spend your bonus, raise, inheritance, or lotto winnings all at the same time. There’s no reason to leave yourself with nothing and have nothing or not much to show for it. Give yourself some time to acclimate to your new earnings before spending it all and have the motivation to save money.
Do you want more information on saving money and stretching your money as much as possible? Check out our blog for more tips and ideas.