7 Smart Ways to Use Cash Windfalls

January 30, 2019

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In the past, I didn’t always make the best use of cash windfalls whenever I received them. Before I started this blog and began budgeting and paying off debt, I spent my annual bonus, tax refund, and any birthday and Christmas money I received on things I didn’t really need.

Unfortunately, it’s all too easy to spend cash windfalls when you receive them, and sometimes even before.

But getting into this habit can end up costing you big time.

For example, a friend of mine used to get a large annual bonus at her job every spring. Knowing it was coming, she’d spend money on whatever it was she wanted, paying it off later when she received her bonus.

Until one year when the bonus never came.

Her company was experiencing hard times and stopped giving employees bonuses. Then she was stuck with a huge credit card bill and no bonus to pay it off.


Smart Ways to Use a Cash Windfall

Instead of getting into the bad habit of wasting your cash windfalls, here are 7 smart ways to use them instead!

1. Put it in Your Emergency Fund

I know this may sound boring, but it couldn’t be more important!

If you don’t already have an emergency fund, a great way to use your cash windfall would be to start one!

Even if you’re in debt and working aggressively to pay it off, you should have at least $1,000 – $2,000 in a mini-emergency fund. This way, the first time something happens you don’t end up taking on more debt to pay for an emergency.

If you already have an emergency fund, give yourself a pat on the back! Assuming it’s not yet fully-funded with 3-6 months’ worth of living expenses, putting your cash windfall into your emergency savings will get you closer to that goal.

2. Pay Off Debt

Obviously, if you’re not in debt then you can skip this one! But, if you are in debt of any kind other than a mortgage, using your cash windfall to help pay down debt is a great idea.

By paying down a large chunk of debt with your windfall, you’ll be saving yourself a lot of money in interest, plus you’ll be able to speed up the timeline to become debt free faster.

One other exception may be something like this.

3. Put it in a Certificate

Although you can earn interest on your windfall if you put it in a high yield savings account, you can probably earn even more if you invest it in a Certificate or a Money Market Certificate at a credit union.

If it’s your first time investing in a Certificate, make sure you pay attention to the timeframe of the investment. If you think you’ll need to access your funds sooner than the maturity date, it may be a good idea to split up your windfall and build a Certificate ladder.

This provides easier access to your funds with the duel benefit of earning more dividends on them than if they were sitting in low yield checking or savings accounts.

Then you can time your Certificate to mature when you plan to use the funds for something else—kind of like a sinking fund for Christmas, a vacation, etc.

4. Add it to Your Retirement Account

Putting your cash windfall away in a retirement account is also a good idea to help you invest for the future and potentially avoid paying as much tax on your lump sum payment.

Funds put into a traditional IRA are tax deductible (up to the limit of $5,500 per year), while funds put into a Roth IRA are still taxable now but won’t be when you withdraw them during retirement.

Speaking to a tax advisor may be a good idea to help you decide which type of retirement account is best for your situation.

5. Make Smart Purchases

If you really want to spend your cash windfall, it may still be ok to do so if you make smart purchases.

Here are a few things that can still be financially advantageous for you to buy with a windfall.

Energy Efficient Appliances

Upgrading to new, energy efficient appliances in your home may be a smart purchase. These can help you save money in the long run. But, make sure you think through these purchases before you use this as an excuse to spend your cash.

If your appliances are still in good shape, you’re in debt, or don’t have an emergency fund, those things should be a higher priority.

Replace Windows and Doors

If your windows and doors are drafty, replacing them can also help you save money on heating and cooling costs in your home.

Replace Cheap and Worn Out Items with Long-Lasting Items

Do you have anything else that’s worn out or needs replacement? Maybe it’s pots and pans in the kitchen, your favorite chef’s knife, or even a pair of shoes or your favorite jeans.

No matter what it is, if it’s needing replacement, it may be a good idea to replace it with something of higher quality that will last longer.

6. Invest in Self-Development

You are your greatest investment and yet most of us don’t take the time, or money, to invest in self-development.

If you’ve received a cash windfall, investing in a professional certification, conference, or even an online course can be a good use of your money.

7. Start a Business

Despite what you may think, it doesn’t have to cost a lot of money to start a business. In fact, here are a few businesses you can start for free (or close to it).

Take a little bit of your windfall money to start or expand your business. Again, this is an investment and the hope is that it will pay off by resulting in more income for you in the future.

Try the 50/50 Rule

If you can’t bear to use your cash windfall for any of the above ideas and really want to spend some of it on things you’ve been wanting to buy for a while, try using the 50/50 rule.

The 50/50 rule is when you take 50% of your windfall money and use it for something you want. Then the remaining 50% is used for one of your financial goals, like debt or savings.


Instead of splurging immediately—or even before you receive a cash windfall in the form of a holiday gift, performance bonus, etc.—evaluate your long-term financial goals and try using your windfall in one of these smart ways.

How do you use your cash windfalls?

This post is in collaboration with PenFed Credit Union. The views expressed in the article are the views of the author and do not necessarily reflect the views of Pentagon Federal Credit Union. PenFed Credit Union is an Equal Housing Lender and is federally insured by the NCUA.

I do #3!

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