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There have likely been times when you have lived better than other times. Some times are hard. Some times are not quite as hard. And sometimes the government gives you a large sum of money because times are hard for everyone.
When that happens, you want to prioritize it well and get the most benefit.
This could be stimulus checks, or even your annual tax return.
I’m not here to argue whether or not the government should do this, but I can help with the spending part.
This works for any lump sum of money… bonus, inheritance, lottery, etc., though if you got over $20,000, I’d head over to this article instead.
This is how I suggest prioritizing it, but ultimately, it’s your decision.
Priority 1: Living
If you’re struggling to make ends meet, your first priority will be living expenses. Many Americans just need a little extra to live right now.
If that’s the case, that’s where the first part of this money should go. It’s not ideal to be in this situation, but at least it makes the decision on where to spend it easy.
Priority 2: Live a Month Ahead
If you’re caught up, but still living paycheck-to-paycheck, use this money to stop that.
Get caught up on your bills and start living a month ahead. You’ll live a much more stress-free lifestyle.
Priority 3: Debt
Once you’re living a month ahead, or if you were already living a month ahead, crush your debt.
A few hundred or thousand dollars, that you weren’t expecting, could easily knock out a huge chunk of your debt.
Priority 4: Build Your Savings
Once you’ve paid off any high-interest debt, or once you’re totally debt-free (your choice), build your emergency fund up.
The old idea of having 3-6 months of living expenses may not be enough. COVID showed us that.
I suggest building up a year of emergency savings, but again, it’s your choice.
Priority 5: Start a Car Fund
Cars are one of the biggest things keeping Americans poor.
Once you’re caught up, use this money to save for your next car. This way you can pay cash and get out of the car-payment trap.
Set up an automatic draft to put this money into savings. If you’re already through the first four priorities, any money you receive monthly could go towards your next car.
Priority 6: Retirement
If you get a match from your employer, you should already be putting enough in your retirement account to receive that match. That’s a 100% return on your money.
If you don’t receive a match, once your first five priorities are accomplished, start contributing to your retirement. At least 15% is a good starting point, but if you can do more than that with this extra check, do it!
Priority 7: Your Children’s College
If this money is coming to you because of your kids (i.e., Child Tax Credit), one could argue this would be a higher priority. Either way, once you’ve made it through the first six priorities, if not sooner, start contributing to a good 529 plan for your kids.
There are other options to save for college, but 529 plans are often your best bet.
Priority 8: Give
I suggest giving at least 10% of your paycheck before you do anything else.
Giving this 10% helped us in a tremendous way when we were barely affording to live.
Assuming you were already giving 10%, if you’re doing well and accomplishing the first seven priorities, consider giving your extra money to a local church or charity.
Endless Options
Of course, this isn’t an all-inclusive list. These are simply guidelines to help you decide where your money should go.
Some of you may be reading this thinking you won’t even be able to escape priority one, and that just means you really need this money. It’s a blessing for you, regardless of the political or economic implications. In that case, use it for living.
Other people may be all the way through this list and wanting more options. In that case, look at the 12 options I gave for spending lump sums.
Further Book Reading
- The Total Money Makeover by Dave Ramsey
- The Automatic Millionaire by David Bach
- Your Money or Your Life by Vicki Robin & Joe Dominguez
Where does paying extra towards your mortgage go on this list? Thank you
Great question! I almost included that, but it depends on your perspective. Some people don’t want to pay off their mortgage early. I wrote a guide recently on paying off your home early that answers all of the popular questions and tells you how to pay off your home quickly. You can read that guide here. But to answer your question, I would put that after #6 if it’s a priority for you.
Thank you!
🙂