Prioritizing Financial Goals After a Windfall

Prioritizing financial goals after a windfall can help you achieve financial independence faster.

This time of year, a bonus or tax refund may hit your bank account, supplementing your regular income. At the same time, an inheritance or divorce settlement can provide a meaningful boost to your net worth—sometimes when you least expect it.

No matter the source, a windfall can be simultaneously freeing and overwhelming. Indeed, it may help you retire earlier than you anticipated or eliminate debt once and for all.

But what if like most people you have multiple financial goals? How should you divvy up excess cash to make the most of your windfall?

Naturally, there are tradeoffs to every financial decision; sometimes these tradeoffs make sense, and sometimes they don’t. In this article, we’re sharing a straightforward approach to prioritizing financial goals after a windfall, so you feel confident you’re allocating your next dollar wisely.

#1: Pay Down High-Interest Debt

Not all debt is bad. For example, a low-interest mortgage or car loan can strengthen your credit without detracting from other financial goals—provided you pay your note on time each month.

On the other hand, bad debt usually refers to credit card debt. For context, WalletHub reports that the average credit card interest rate is currently 21.92% for new offers and 19.07% for existing accounts.

High-interest credit card debt can easily rob you of your hard-earned money if you carry a balance month-to-month. In fact, if you only make your minimum payment each month, you can extend your payoff date by years due to interest accumulation.

Thus, most financial experts recommend paying off high-interest debt first when it comes to prioritizing financial goals after a windfall. In most cases, the cost of bad debt far outweighs the benefit of putting your money to work elsewhere.

#2: Give Your Emergency Fund a Boost

If you don’t have high-interest debt, the next step is to focus on your emergency fund.

An emergency fund can protect you and your family against unexpected setbacks like a job loss, unplanned home repairs, or uncovered medical expenses. It can also help you avoid dipping into your retirement savings—as well as the associated penalties.

A general rule of thumb is to set aside enough cash to cover at least three to six months’ worth of living expenses. However, you may need more depending on the nature of your employment, lifestyle, and financial obligations.

The good news is with interest rates on the rise, there are many opportunities to earn money on your cash savings right now. This can provide a meaningful tailwind for your emergency fund, allowing you to prioritize other financial goals after a windfall.

#3: Take Advantage of Employer Matching Programs

Many employers incentivize their employees to save for retirement by matching their retirement plan contributions. For example, they may offer a partial match or dollar-for-dollar match up to a certain percentage of your salary.

Essentially, an employer match is “free money.” This can be very valuable in the long run and help you reach your financial goals faster thanks to the power of compounding.

If your employer matches your contributions to a 401(k) plan or other employer-sponsored retirement plan, find out what the terms are. At a minimum, you’ll want to contribute enough to receive as much of the match as possible. Otherwise, you’re leaving money on the table.

#4: Max Out Tax-Advantaged Saving Accounts

Even if your employer doesn’t match your retirement plan contributions, you can (and should) focus on maxing out your contributions to tax-advantaged retirement and health savings accounts, if available.

Be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans. In 2023, you can contribute up to $22,500 to a 401(k) plan and $6,500 to an individual retirement account ($7,500 if you’re aged 50 or above).

In addition, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA). An HSA can be a great way to save and grow your money on a tax-advantaged basis as they offer triple tax savings. Contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses.

#5: Pay Down Low-Interest Debt

If you’ve checked off the first four boxes on this list, you’re well on your way to financial freedom. It’s up to you to determine which financial goals you want to prioritize next.

For example, some people may choose to pay off any remaining low-interest debt like a mortgage. This can free up a large portion of your fixed monthly expenses, allowing you to focus on other financial goals and aspirations, like buying a vacation home.

SageMint Wealth Can Help You Prioritize Your Financial Goals After a Windfall

When you have competing financial goals, it can be hard to know where to allocate your next dollar—especially if you come into a windfall. But having a well-defined financial plan can help.

SageMint Wealth is a Southern California-based wealth management firm for high-net-worth individuals, families, and business owners. We have a passion for supporting women, the LGBTQ+ community, and individuals in the technology space. If you’d like to work with an experienced financial planner to identify your financial goals and develop a long-term plan to achieve them, please contact us. We’d love to hear from you.