Not sure how to handle a large check? Here are four key actions you should take

Making the Most of a Sudden Financial Windfall

Receiving an unexpected sum of money can provide a significant boost to your financial situation—if you pause to thoughtfully consider how to use it.

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Essential Points to Remember

• Carefully allocating a lump sum can greatly improve your financial health, especially if you avoid making impulsive purchases and instead focus on your long-term objectives.
• There's no need to dedicate all your newfound funds to a single purpose—dividing the money among several priorities allows you to advance multiple goals simultaneously.
• Directing extra cash toward savings, debt repayment, or long-term investments can enhance your financial flexibility and ease money-related stress.

When you receive a large payment, it can be tempting to treat it as a windfall for immediate spending. However, whether the money comes from a bonus, inheritance, or another source, it has the potential to do much more than fund a short-lived indulgence.

With some forethought, this extra money can strengthen your financial foundation for years to come. The most important step is to consider where it will have the greatest positive effect, rather than spending it all at once.

Why Planning Your Windfall Matters

Taking the time to strategize how you use an unexpected sum can transform a one-time payment into lasting financial progress.

You Can Pursue Multiple Goals with Extra Money

When a lump sum arrives, you might feel pressure to make the perfect choice—should you pay off debt, increase your savings, invest for the future, or treat yourself? Fortunately, you don't have to pick just one option.

Often, dividing the money among several priorities is the best approach. This way, you can enjoy some immediate rewards while also making strides toward long-term stability. A common strategy is to allocate a small portion—typically 10% to 25%—for personal enjoyment, while dedicating the remainder to more significant financial objectives.

For instance, if you receive $2,000, you could spend a few hundred dollars on something special, contribute to your emergency fund, pay down high-interest debt, and invest the rest. Even if the amount isn't enough to fully achieve a single goal, spreading it out can help you make progress in several areas at once.

The Value of an Emergency Fund

Even a small emergency fund can help you manage unexpected expenses without turning to credit cards. Since many people lack enough cash to cover even minor emergencies, setting aside part of your windfall can make a meaningful difference.

Choose the Right Place to Grow Your Savings

If you decide to save part of your lump sum, where you keep those funds is important. Storing money in a low-interest account can limit its growth, especially when better options are available.

For easy access and better returns, consider a high-yield savings account. If your current bank doesn't offer a competitive annual percentage yield (APY), you can open a new account specifically for savings. Many online banks and local credit unions provide attractive rates.

Keep in mind that savings account interest rates can fluctuate. If the Federal Reserve continues to lower rates in the future, your earnings may decrease.

Alternatively, you could secure your interest rate with a certificate of deposit (CD). While CDs typically offer less flexibility—you may lose some interest if you withdraw early—you can choose a term that fits your needs, ranging from a few months to several years.

How Small Barriers Can Support Your Savings Goals

Transferring money into a separate high-yield account or locking it in a CD can make it less tempting to spend impulsively. This minor hurdle can help you stay committed to your savings plan.

Reduce High-Interest Debt That’s Slowing You Down

If you have high-interest debt—generally anything above 6% or 7%—using a lump sum to pay it down can save you significant money over time by reducing interest charges.

Paying off debt, especially if you can eliminate entire balances, also frees up room in your monthly budget. For example, if you’ve been paying $200 a month toward credit card debt, clearing that balance allows you to redirect those funds toward savings or investments.

Eliminating high-interest debt can also help improve your credit score, though the benefits may take some time to appear. Over the long run, a higher score can help you qualify for better rates on loans, such as a lower mortgage rate.

Keep in Mind

Not all debt should be paid off early. For example, low-interest loans like many mortgages may not be worth eliminating ahead of schedule. You might see better returns by investing that money in high-yield savings or diversified, low-cost investment options.

Invest for the Future After Covering Essentials

If you don't need immediate access to your windfall, investing for the long term is a smart move. Consider contributing to a tax-advantaged retirement account, such as a traditional or Roth IRA.

You could also use the funds to increase your 401(k) contributions, especially if it helps you receive a larger employer match.

Another possibility is investing through a taxable brokerage account. While these accounts may not offer the same tax advantages as retirement accounts, they provide greater flexibility if you’re saving for goals like home improvements or other major expenses.

By investing a portion of your lump sum, you can create more opportunities for yourself in the future, making it easier to achieve big goals without relying on another unexpected windfall.