What to Do With a Large Sum of Money

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If you receive a large sum of money, often called a windfall, your first thought is probably along the lines of: “OK, now what do I do with it?” Good on you for taking a second to make a plan — it’d be a shame to squander a large sum of money. Here are six things you could do with a windfall.

1. Put it in a high-yield savings account

One of the better places to put a large lump sum of money is a high-yield savings account. High-yield savings accounts have higher interest rates than average, often as high as 5% APY. These deposit accounts can grow your balance without any work thanks to the power of compound interest.

However, if your lump sum is over $250,000, be careful placing it all in one deposit account. Most deposit accounts are only insured by FDIC or NCUA insurance up to $250,000. If your windfall is larger than that, you can either spread the amount across multiple accounts or put it in a deposit account with higher insurance.

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2. Pay down high-interest debt

If you have any consumer debt, like credit card balances, personal loans, payday loans or anything similar, using your windfall to pay it down is a great idea. American credit card holders report owing an average of $3,929 in credit card debt, according to the Finder Consumer Confidence Index.

Unsecured debt is notoriously hard to pay down, and with its high interest rates, it can be very costly if you don’t pay it off quickly. The only thing to watch for are possible prepayment penalties, which is a fee charged if you pay off your loan faster than planned, but those aren’t typical with credit cards.

3. Invest it

One of the most common suggestions (and a great one) is to invest large sums of money outside of your typical income. With a large sum of cash that isn’t included in your everyday budget, investing in retirement is a wise use.

Some investing or retirement planning options include:

• Maximize 401(k) or Roth IRA contributions
• Invest with a brokerage account
• Invest in exchange-traded funds (ETFs)
• Check out robo-advisors
• Consider alternative investments

4. Accelerate financial goals

Do you have plans to buy a house? Want to pay off your student loans? Looking to start a business? Were you working on a “Financial Independence Retire Early” (FIRE) plan? With a large sum of cash, you can accelerate those plans.

5. Create an emergency fund

If you don’t have an emergency fund or it’s not exactly bursting at the seams, using your windfall to bolster it is a good plan. Emergency funds can help out in case of medical emergencies, car troubles, job loss or anything else that could happen outside your normal monthly budget.

The size of your emergency fund depends on your monthly expenses. Most agree that an emergency fund should have at least three to six months of living expenses, including loan payments, housing, groceries, utilities, insurance and so on.

For even more savings, you can also place your emergency fund in a savings account to earn interest.

6. Save for your family’s future

If you have kids, saving a sudden large sum of money for their education, first car or a wedding can be a great use of that cash.

There are investment accounts for kids, such as 529 savings plans designed to save for education expenses. There are also teen-owned brokerage accounts, UGMA and UTMA accounts and custodial IRAs. No matter which option you choose, be sure to factor in taxes and when the funds are released to them. In most cases, investment accounts for kids give parents or guardians full control and responsibility over the account until the child reaches the age of maturity, usually 18.

Bottom line

Whether you got this lump sum from an inheritance or lottery, it’s nice to have money that’s outside your typical earnings. If you’re still not sure what to do with your windfall, it may be a good idea to talk to a financial advisor.

While you’re deciding what to do with your new lump sum of cash, at the very least, consider putting it in a compounding account so it can continue to grow.