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If we’ve recently come into a windfall of cash – from a gift, lottery, or inheritance – figuring out what to do with it is trickier than it seems. Paying down debts or increasing our retirement savings are obvious choices, but is it the best option? It depends on our individual situation.

The first thing we should do is nothing. It doesn’t matter if we’ve just received $1,000 or $100,000, we need to take a step back and think about what we can do with this money. Saving all of it might be the answer some give, but I’ve always felt that there needs to be a balance between spending and saving. Let’s look at the different scenarios that may affect us.

What to do with $10,000

Pay down high-interest debt

If we have any outstanding high-interest debt (credit card or car loans), then we should pay those off immediately. Credit cards have interest rates averaging 20% while car loans can easily be 5% plus. By paying those down, we’re getting an instant return.

Let’s assume that those debts are now fully paid off; we need to ask ourselves how we got ourselves in that position to begin with? If we got into debt due to excessive spending, that’s something that needs to be addressed. Maybe we need to take another look at our budgets or cut up some of our credit cards to keep our spending in check. Just understand that the windfall we got won’t last forever, and there’s no guarantee we’ll ever get another one.

Build an emergency fund

Debt may not be an issue for some of us, but do we have enough saved in our emergency funds? Some experts say that we should have six months worth of expenses saved in cash that we have easy access in case of a financial emergency. I personally think three months is enough, but again it depends on our individual situation. Three months worth of savings is probably fine for someone who has access to other assets they could sell, but if we’re in a single income situation with dependents, saving six months is the safer play.

Remember, an emergency doesn’t just mean a job loss. Our home might need an emergency repair, or we could run into a situation where our health prevents us from working. Saving for an emergency fund isn’t very sexy or fun, but think of it as a mini insurance policy for ourselves.

Use it as a down payment or prepayment

If buying a home has been on our minds, $10,000 can go a long way. The above two things should still come first, but if we’re in the clear there. I’m not opposed to using the entire amount to help fund a down payment. Keep in mind that $10K isn’t a lot in the grand scheme of things. In Canada, we need a minimum of 5% down just to qualify for a mortgage and 20% if we want to avoid CMHC insurance.

If we’re already homeowners, and our lender allows it, we could take that sum and make a prepayment. Any extra payments go directly towards our mortgage which will help reduce the amount we owe. Keep in mind that interest rates are pretty low right now so it might be a better idea to invest the money instead.

Max out your accounts

My mortgage is currently 5 years fixed at 2.39%. I’m fairly confident I can get a better return in the markets which is why I’ve been focusing more on my TFSA. Every year I’ve been maxing out my amount and investing in index funds. Since I have a pension, I’ve purposely been ignoring my RRSP, but you need to look at your portfolio and decide where to allocate your money best.

If you have kids, then using that cash might be better used for their Registered Education Savings Plan (RESP). Remember, the government matches contributions by 20% up to a maximum of $500 a year. So that means we could turn that $10,000 into $12,000 over a period of 4 years. Alternatively, if you have unused grant eligibility, you can qualify for up to $1,000 a year per beneficiary. Where else are we going to get a return like that?

Final thoughts

There’s nothing wrong with spending a portion – say 20% – on something fun such as a vacation or new tv. As long as we’re saving the majority of the money, we’ll be just fine. The easiest way to avoid blowing it all is to simply allocate our savings directly into different accounts. Pay yourself first and what you spend after won’t matter.


About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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