The Best Way to Handle a Cash Windfall

Getting an unexpected cash windfall sends many people on buying sprees. Not so fast, says Day to Day personal finance contributor Michelle Singletary. She speaks with Madeleine Brand about the best way to handle a windfall.

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MADELEINE BRAND, Host:

Let's say you strike it rich. Your lottery ticket is finally a winner; your eccentric aunt dies, leaving you 20 cats and a small fortune; maybe your tax refund is bigger than you expected; well, you could spend all that money on a wild weekend in Vegas, or you could invest it. And if you're a regular listener, you know what Michelle Singletary would advise. She writes the syndicated column, The Color of Money. She's our regular guest on matters of personal finance. Hi Michelle.

Ms. MICHELLE SINGLETARY (Columnist, The Washington Post): Hi.

BRAND: So what is the first thing people should do if they come into some cash?

Ms. SINGLETARY: You know, they're going to be surprised at this. You need to park the money. Don't do anything for at least three months, maybe six, so that you can kind of get your bearings. That's where people go wrong. They get a large sum of money and they go right out and spend it or invest it and they haven't really looked over their entire financial situation; so park it.

BRAND: Park it where?

Ms. SINGLETARY: Well, you can park it in a 30-day treasury bill or a money market mutual fund. And they're averaging about four percent; you might be able to get it a little higher. And that will give you a chance to really think about what you want to do with this money.

BRAND: And if you have a small amount of cash, what are the best investments?

Ms. SINGLETARY: Well, most of the time, when people get a small windfall, the first question I ask them is, do you have any credit card debt? Because the best investment that you can do is to pay off that credit card debt, particularly if your interest rate is high. If it's six, seven, eight, 10, that's an automatic return for you to pay off that bill first.

BRAND: And if you've listened to you - let's say we've listened to you and we don't have any credit card debt, what should we invest in?

Ms. SINGLETARY: You might look into your retirement fund. If you've not contributed to your retirement fund, you may want to add that to it, or get an IRA, Individual Retirement Account set up and invest in that. And you've got to take a step back. What are my financial goals immediately? If you want to buy a house, instead of investing that, you want to put that in a housing fund if you're going to buy that house in five years or less. So if it's a small amount, look at where you haven't been putting money that you would like to and put it there.

BRAND: You know, Michelle, also a lot of people probably should be aware that there are tax implications in receiving money and that perhaps there are some tax shelters that they could invest in to offset some of those tax implications.

Ms. SINGLETARY: That's right. If you receive a large amount of money, the first thing after you park it and don't shop, is get some advice if it's a huge amount of money. So you want to pay your taxes if they're due; lottery winnings, absolutely; if it's a life insurance policy, you generally do not owe taxes on that amount; but an inheritance, you have to look and see if you owe it. So, you know, consult a tax professional, because you do not want to get in trouble with the IRS.

BRAND: Well, Michelle, what if we do want to have a little fun with our mad money. What is a reasonable fraction do you think of this money we received in this windfall to spend on something frivolous, let's say shoes for instance?

Ms. SINGLETARY: You got enough shoes. Don't spend no money on no shoes.

(Soundbite of laughter)

Ms. SINGLETARY: I'm saying you need to look at your overall financial picture. And if after you've funded all of that, you've taken care of retirement, college fund, you have three to six months limited expenses, you have no student loan debt, no credit card debt, then sure, take that vacation that you've always dreamed of. Buy that car in cash that you want, hopefully used, because it's a better deal. So look at the things that you really want. Because if you've taken care of those other things first, then you can have fun.

BRAND: Michelle Singletary is our regular contributor on matters of personal finance. Her latest book is Your Money and Your Man: How you and Prince Charming Can Spend Well and Live Rich. Thank you, Michelle.

Ms. SINGLETARY: You're welcome.

BRAND: And if you have personal finance questions you'd like to ask Michelle, go to npr.org, click on the Contact Us button, and please put Michelle in the subject line.

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