The term “a large sum of cash” has a different meaning to everyone. To me, $500 would be a large sum of cash, but to others who are wealthier than me this may not seem like something to get excited about. Maybe a better question would be, “If you were handed a meaningful sum of cash today, what would you do with it?”
Without putting any real thought into the question, we could say that we’d buy something for ourselves such as a new phone, a new car, or a new house, depending on the amount of money. However, if we think more deeply into the question, there are choices that would have to be made in this situation.
The first thing that I’d do is to lay out my options. Some of those choices might be:
- Prepare for emergencies
- Save it
- Pay off debt
- Invest it
- Help someone else
- Spend it
Prepare for Emergencies
You could spend the money on something that you’ve been wanting for a while, but the first two things that I’d evaluate would be if I had a proper emergency fund established and if I had the proper insurance coverages in place. These are the framework of a solid financial foundation. If the answer to either of these questions was no, then the decision-making process would end here. The answer would be obvious. Granted, there could be some money left over to do something with after proper insurance coverages are put in place.
Save It
If you have an adequate emergency fund and are properly insured, then the next thing you might think to do with the money is simply to save it. If you know that you have a large upcoming expense that the money could help you pay for, or some other short-term goal, then parking it in your savings account would probably be a good option.
Pay Off Debt
If you can’t identify any expenses that will need to be covered in the near-term, then perhaps you have debt that you’ve been itching to pay down. Sometimes, it’s not the mathematically optimal option to pay down debt, but that’s a different discussion. Paying off high interest rate debt may be a good option for the money because you are sort of “guaranteeing” yourself a return. Additionally, if you have enough money to pay off the debt completely, then you will free up cash flow from the payment you were making on the loan that you can then utilize to put towards paying off more debt or saving.
Invest It
If you’ve walked through the steps above and haven’t identified any needs for the money, then investing it may be your best option. Investing the money for retirement may get you a little closer to your goal. On the other hand, maybe you would like to invest it in a 529 Savings Plan for your child’s college education. No, buying a new car isn’t an investment.
Help Someone Else
If you don’t need the money at all and you feel that the money could better serve someone else, then you could give the money away to a family in need or a worthy cause that you support. Not only would this be a good use of the money, but it would probably also make you feel good for helping others.
Spend It
Finally, if you’ve gone through all of the options above and haven’t identified any that you feel are right for your money, then go ahead and spend it! If you’ve mad it to this step, through an honest evaluation, then you’ve likely put yourself in a pretty good financial position and you deserve to treat yourself.
Obviously, this doesn’t have to be an all or nothing approach. You could have saved some of the money to spend on yourself rather than utilizing it all on one of the options above. However, I think it’s a good idea to try and identify where the money could be put to work in the opportunities above first. Remember, spending on experiences provides more happiness than spending on stuff.
