NEW YORK (MainStreet) — Whether it's a structured settlement, an inheritance or even lottery winnings, cash windfalls happen. But if you're lucky enough to get a cash windfall, the last thing you should do is squander it. Before you start spending that big chunk of change that landed in your lap, get some solid advice on how to spend it the right way.
Wait Before You Do Anything
Chris Hogan, a personal finance expert and Ramsey speaker, says he constantly has people coming to him and asking what to do with cash windfalls. People's clueless approach can be dangerous. "I've seen people blow through $200,000 inheritances simply because they didn't have a plan for it," he says. So his advice is now always to put the money in a money market account until they know what they're going to do with it. "Park the money, get a game plan, then move forward," he says. You might not have to park the money for long, but taking a deep breath before you spend anything is a prudent move.
Realize You Can Have Your Cake and Eat It Too
"There's nothing wrong with enjoying some of it," says Hogan. "Not all of it has to be used for financial responsibility." Just how much should go to frivolous fun? "When I talk people through it, I don't have a percentage breakdown, but I do tell them to use common sense" he says. "If you get $20,000, don't spend $15,000 on a vacation. But maybe take $3,00 and take a trip and have some fun." Hogan says that it's important to think in terms of dollar amounts rather than charts and percentages. "People spend dollars," he says. "Percentages are this thing that people who are good at math can do. But most people don't think that way." Hogan says he has literally taken over $20,000 in cash and laid it on the table to show how much the person is going to spend on fun and how much they're going to spend responsibly. Visualization is a powerful tool for conceptualizing money.