Receiving an unexpected windfall of money can be both a blessing and a curse, especially if the money is not handled correctly.  Many people that receive an unexpected windfall in the form of lottery winnings, legal settlements, or an inheritance find that the money is gone within a few years and they have no idea where the money went.  Handling an unexpected windfall responsibly can help you secure your financial future and cushion you against unexpected emergencies.

Wait Before You Begin Buying

When an unexpected monetary windfall occurs, the first instinct is to imagine all of the things that you can now buy that you couldn’t afford before.  This is the most dangerous time period for someone that has received unexpected money because this is where spending can quickly get out of control.  The best course of action is to place the money into an interest bearing savings account for a period of at least two months without spending it to give you time to identify what you really need and how the money should be spent, if spent at all.

Obtain The Advice Of A Professional

Many people that receive an unexpected windfall have no experience handling large amounts of money, which makes them more prone to making mistakes with their newfound funds.  Some people choose to enlist the help of a professional financial advisor to help them determine how the money can best be used to benefit them and their families.  Financial advisors, attorneys, and accountants can help steer you through difficult financial issues and make sure that you do not make any costly mistakes along the way.

Eliminate Your Debt

One of the best ways to use an unexpected windfall of money is to pay off any high interest debt you have accumulated.  Paying off these debts will release you from a heavy financial burden and save you money in interest charges and financing fees charged by the credit card company.  After your debts have been eliminated, do all that you can to avoid accumulating more debt in the future so that you never have to worry about paying off high interest debt again.

Maximize Your Savings Accounts

The majority of the money from the unexpected windfall you receive should be saved for future expenses.  The money should be used to build up your emergency fund, maximize your retirement accounts, and placed into saving vehicles for your children’s college education.  Preparing for the future is one of the best things that you can do with an unexpected windfall because the opportunity to make yourself secure financially with such simplicity may never occur again.

Saving is a very important part of financial stability, yet many people neglect to focus on saving and some have no savings in reserve at all.  People have many excuses for not saving, including that they do not make enough money or that they are planning to start a savings account when they are more financially secure, but the truth is that these excuses are leaving these individuals vulnerable to financial devastation in the event that the unexpected happens.  Saving money for the future may seem like an impossible task, but once you get started you will see that it can be easier than you ever imagined.

An important part of saving is having a budget.  A budget provides you with a plan for spending that allows you to have some money left over at the end of the month after all of your necessities have been paid for.  This is necessary to know where your money is going each month and how much you can afford to put into savings on a regular basis.  Many people that follow a budget list the amount that they agree to put into savings each month as an expense on their budget and remove the money from available spending funds as soon as it is received.

Experts recommend saving at least 10% of your earnings in a savings account for future needs.  Although this may seem like a large amount, it really is not and after a few months of removing the amount from your available funds as soon as you are paid and you will not even miss the small amount that is helping your savings accumulate.  If you are finding it difficult to save 10% because your monthly expenses eat up most of your paycheck, you need to sit down and identify some areas where spending can be cut before you find yourself deeply in debt.

There are many different ways that you can cut spending to increase savings.  Some people choose to take their lunch to work each day instead of purchasing a high priced prepared meal.  Others choose to eliminate unnecessary cable and cell phone packages to reduce spending.  Finding creative ways to reduce your spending to a level that will allow you to save at least 10% of your income in a savings account will go a long way towards securing your financial future.

Some employers make it easy for you to save money quickly by allowing employees to deposit their paychecks into multiple accounts using direct deposit.  The amount diverted into each account can be set as a particular amount, such as $50 per check, or as a percentage of the total amount.  Using this method to place 10% of your paycheck into a savings account automatically dramatically reduces the risk that the funds will be spent on other items instead of being saved.  Saving is easier than it seems when you focus on your financial goals and make an effort to follow your budget.

When it comes to saving for retirement, excuses and reasons to put off saving abound.  Maybe we believe that there are more important things to spend our money on or that retirement is so far away that we have plenty of time before we must begin.  Although these justifications may seem reasonable at the time, they can do great damage to your financial future if they prevent you from saving adequately for your retirement years.

Here are the most common reasons for not saving for retirement and how to overcome them.

I Don’t Earn Enough Money!

If you do not earn a big salary, it can be difficult to save for retirement because there are many immediate demands on your income.  Although you may be living paycheck to paycheck, saving even small amounts can significantly improve your financial outlook for your retirement years.  If you can save $20 per month, at the end of the year you will have saved $240 with little change in your quality of life.  As you grow accustomed to putting a small amount into savings each month, gradually increase the amount saved by allocating half the amount of received pay raises or bonuses into the retirement account.

I Need To Save For College First!

Many parents put off saving for their retirement so that they can save for their children’s college education first.  Experts warn against neglecting your retirement savings to fund a college savings plan because there are more opportunities to borrow or gain money for college than there are opportunities to obtain extra money for retirement.  Parents can always help their children pay off a student loan and should focus on ensuring that their retirement years will be secure so they will not be a financial burden on their children later in life.

I Have Plenty Of Time For Saving!

Focusing on a financial goal that is decades away can be very difficult with so many immediate expenses facing us everyday.  Saving for retirement now will reduce the amount of disposable income you have for other purchases, but beginning early means that you can save a lower amount of money over a longer period of time to reach the same savings goal.  An individual in their mid-20’s that saves $2,500 per year in a retirement account earning an average of 7% interest can have nearly $518,000 saved by age 65.  An individual beginning to save at age 40 would have to place nearly $7,900 per year into the account to reach the same goal.

The savings rate in American has severely declined over the past decades to be virtually non-existent today.  This means that many people across the nation are living close to the edge without any savings or are carrying debt because they have spent more money than they have earned.  Instead of saving up for the things that they wanted, they placed the purchases on their credit cards to be paid off at a later date.

Although commercials continuously show that you can use credit cards to purchase all the things that you desire without physically having the money to pay for it, they do not show you all of the pitfalls that come along with using your credit cards instead of your savings to pay for what you want.  Because of these factors, saving your money to purchase large ticket items is a better financial strategy than purchasing the item on credit.

Increased Costs

You will pay more for an item purchased on credit than you would if you had purchased that same item using cash.  This is because of all of the additional fees and charges associated with using a credit card for purchases.  In addition to the interest charged for placing the purchase on the credit card, there is also the annual fee for the credit card and any other expenses that occur from having a purchase on the credit card, such as late fees and over the limit fees.  Although these costs are not directly assigned to a particular purchase, you are still paying them because of the purchases made with the credit card so a portion of these costs can be assigned to each purchase made.

Financial Issues

Debt has a way of quickly spiraling out of control if not managed correctly and avoiding debt is the easiest way to avoid encountering these problems.  People that are not carrying debt and have some money saved in a savings account are better equipped to handle the small financial emergencies that can arise at any time.  They have less risk of not being able to pay all of their bills or harming their credit score.  These people are also better positioned to make large purchases in the future, as they will have an adequate down payment for their purchases.  Saving your money to spend it is a much better strategy that using credit to make purchases.

It is a common belief across the nation that a person has to buy a home to invest in their future.  However, another common belief is emerging as well, the belief that you must rent to live a lifestyle that allows you to enjoy yourself and your money and that the price of home ownership is not worth it in the long run.  Both beliefs bring up valid arguments, but whether a home will be an asset or a liability will depend on the person making the purchase.

Buying A Home

There are many individuals that aspire to own their own home and work very hard to achieve their dream, often working multiple jobs or going without unnecessary items to save enough money for a down payment.  Purchasing a home allows the individual to do whatever they would like to the home to customize it to their particular tastes.

There are many hidden costs associated with homeownership that can be a great deal more than the owner expects.  This is one of the primary reasons for homeowners defaulting on mortgage agreements.  Some common hidden costs that they forget to take into account include the lawn care equipment and products, water and sewage bills, increased energy costs, and repairs to the appliances in the home.

Renting A Home

On the other side are the individuals that believe that renting a home is the only way to go.  They see the costs of homeownership as so expensive that many individuals have no money leftover for the things that they would really like to do and have to live with a lower quality of life because of the expense of owning a home.  For them, the many benefits of renting outweigh the attractions of owning their own home.

The renters have many of the same rights to the properties that they are living in as the homeowners living in other properties because their rental payments are purchasing the right to live in the property as their home.  Renters are not typically allowed to make structural changes to the property and must return the home to its original state if they choose to move to another location.  Renting a home frees the renter from the cost of major repairs and the rental agreement with the property owner ensures that any structural piece of the property that becomes broken will be fixed promptly and correctly.

One of the most difficult financial decisions to make is how much you should be saving for a comfortable retirement.  There are so many unknowns looking that far into the future that many people are so unsure of what to do that they do nothing at all.  Finding the balance between preparing for tomorrow and sacrificing luxuries today can be hard, but by following some simple rules of saving, you may be able to save enough for retirement while still enjoying the quality of life you desire today.

Financial experts recommend that between 10% and 20% of your income be put away for retirement savings and the percentage that you choose to save will depend on what you would like to do during your retirement and whether you will have any other sources of income during your retirement years.  Here is how each of those saving percentages will affect your retirement years.

10% Of Earnings Saved

Saving 10% of your current earnings for retirement should be enough to cover the basic necessities of your retirement years.  Saving 10% is recommended for those who anticipate having other income streams during their retirement years that will be able to supplement their retirement savings or plan on working part time during their retirement years.  10% of current earnings is a reasonable estimate for basic retirement necessities if you begin saving for retirement before you reach the age of 30, but if you begin later in life, you will need to add another 5% of earnings to your savings to make up for the amount not deposited in earlier years.

15% Of Earnings Saved

Saving 15% of current earnings in a retirement fund should allow you to maintain your current quality of life during your retirement years.  This amount should cover all of your regular household expenses plus enough for small luxuries like occasional meals in restaurants or trips to the movies. This amount is recommended for individuals that plan on relaxing or following inexpensive hobbies during their retirement years.

20% Of Earnings Saved

If you plan on spending your retirement traveling from state to state or seeing exotic locations, no less than 20% of your current earnings should be placed into your retirement account.  If placed into an interest bearing retirement savings account, you will have a significant amount saved for your retirement.  Traveling is expensive and gets more expensive every year so it is best to plan accordingly and save as much as you can to be able to live the lifestyle you would like after you have retired.

You can have an IQ bordering the genius level and still make dumb mistakes with your investments.  Some of these mistakes are due to not thinking things through properly while others are the product of years of emotional manipulation by marketing companies or trusted friends and family.  Here are some of the dumbest investment decisions that people make and how to avoid them.

Holding On To Bad Investments

It can be difficult for some individuals to admit to themselves that they invested money into the wrong business, but this denial can cause the loss of a significant portion or all of the money invested.  Others choose to hold onto bad investments because they were inherited from a loved one or because of loyalty to the company.  Unfortunately, this is a disaster that happens frequently and these people lose most if not all of their investments. 

No more than 10% of your money should be allocated towards any one stock and your portfolio should be diversified with several different types of investments to ensure that you are not wiped out if one or two companies fail.  For each stock, you want to identify a price level at which the stock will be sold if it falls to that price and stick to your own recommendations.  This way, you will limit the losses on any investments that go bad.

Chasing Hot Stocks

Many investors make the mistake of chasing hot stocks just as they are about to turn cold, paying an inflated price for the stock and losing most of their investment in a fairly short time period as the market for that stock begins to cool.  If a large number of professionals are publicly singling out a stock for great returns, chances are that the stock has reached its peak and will begin to decline as multitudes of investors chasing a hot stock pour money into the investments.  Investments like these seldom pay investors more than they initially invested and often cause the loss of most of the money invested.

Not Doing Your Research

A large number of investors have investments in their portfolio for no other reason than a source that they trusted called the investment a good deal.  Without doing some independent research into the stock, there is no way to tell if the stock is really a good deal or if someone is trying to convince you to buy junk to increase the price of the units the individual recommending the stock holds.  It is best to investigate any stock tip for yourself and come to your own conclusions about the value of the stock you are considering.

The one thing about financial or economic news, is it can move up and down from hour to hour, and ultimately confuse a lot of people who don’t understand what’s happening because of the many variables involved coming from so many sources and viewpoints.

With that in mind, don’t get confused when putting away money for savings. For the most part, all that economic or business news has little to do with us at the individual level, and make make us think too much … to the point of rendering us paralyzed financially, or to make decisions based on macro-information which probably will have no effect upon us.

By macro-information, I mean news from around the world which takes into account the larger, global economic picture, and not the local.

Don’t allow all this chaotic news and variety of viewpoints affect the decision you’ve made to set aside a certain amount of money to take care of your needs in case of an unforeseen event which causes you to lose predictable income. Things like getting fired, laid off, injured, etc., which will cause you to lose monthly income.

No matter what happens economically, it’s never, and I do mean never, a bad idea to put away money for unexpected circumstances which can hurt you financially.

Some people give up or tell themselves things like “what does it matter?” or other dis-empowering thoughts, questions or statements, which ultimately create a self-fulfilling prophecy for those who think like that over a period of time, which causes them to stop putting money aside out of fear or feeling it won’t matter.

It does matter, and just remember that all the negative economic news, or even the economic news that sounds positive, is usually referring to circumstances of a country, or region in the world. Most the time it won’t have a direct impact on you, and even when it does, it’s usually in the loss of a job or hours being cut back, i.e. your income stream is either lost or diminished.

Either way, having money set aside is the best way to prepare for it, and no matter what happens around the world, or what economic news is reported, those who are prepared by having savings will be far better off than those who live from paycheck to paycheck with no backup funds.

So regardless of what happens, continue to sock away money for the times that could come where you’ll need to draw on your own money in order to continue living as you’re accustomed to.

Don’t let economic news – one way or the other – determine your savings plan or practices. Make a plan and work the plan, and forget about the big picture which at worst, will only have an indirect effect on your personal finances.

There will always be economic ups and downs which have the potential to disrupt our lives, those best prepared for those times are those who continue to save and build their wealth during those economic swings, largely ignoring the bigger picture and focusing on their own little economic corner of the world.

Making financial decisions which will affect our lives is one of the more important things we do, as it has an impact on almost every other area of our lives, and so it must be done with a minimum amount emotion.

What this means is developing and implementing a plan before emotion becomes a driving factor in the financial decisions we make. If we’re not prepared, then the events we face will drive the actions we take, and that is largely based on emotion when we’re surprised or caught off guard.

This is why setting aside savings to deal with the unexpected is so important, as once you start being driven by unexpected circumstances when you’re not prepared to deal with them, emotions are the key driver, and they can deceive you and leave you down all sorts of paths which aren’t financially healthy or sustainable.

It’s not the unexpected which is the cause of the emotions, it’s not being prepared for the unexpected which causes emotions to get in the way of common sense at times like these.

The problem of course is what happens when you’re working a good financial and investment plan and you’re caught in the process of putting it into action, but it can’t take care of an event which happened?

At this time it’s best to stand back, calm yourself, and reevaluate your overall circumstances. We must strongly resist making any decision immediately without going over everything.

There’s a reason you made a financial plan in the first place, and a reason you made the specific plan for you and/or your family. Nothing in that should change, even if you must temporarily put the plan on hold to deal with whatever has come up to disrupt it.

If it’s as simple as losing a job, and you are collecting unemployment benefits which allow you to only live at a very basic level, you can’t press to continue on with your savings and investment plan if you aren’t able to afford it.

On the other hand, you don’t want to throw the plan out as unattainable either, as that would develop habits which will harm your finances and goals over the long term.

The best thing to do is deal with reality and face the situation that is handed you. Don’t fall into despair where you make decisions which override what you’re trying to do over a lifetime.

Everything is a temporary setback, and it will change. That’s how to deal with emotions attempting to overwhelm you.

If you can get hold of your emotions and manage them, you’ll find all that has happened is your march toward financial independence has only been temporarily thwarted, and when things change they’ll continue on as they were; whether or not it’s through getting a different job, recovery from health problems, or whatever it is that caused the situation to happen in the first place.

Always take yourself mentally and emotionally out of the circumstance you’re in to get an objective look at the overall financial picture. Understand what it is you can or cannot change in the immediate future and the adapt yourself to what you face.

This is vital become emotionally-driven decisions of any sort are usually harmful over the long term, and that includes financial ones. What inevitably happens is you extend the financial pain you’re going through and make it much harder and deeper than it originally would have been.

In the end, you can’t control the unexpected in life, but you can control how you respond to it. Controlling responses deals with being calm and relaxed and trusting in the financial plan you’ve made, even when the circumstances you face scream for you that they don’t work.

There only a couple of reasons to keep our money in a low-interest savings account, one, to have immediate access to your money when unexpected circumstances arrive, and two, having it parked while you wait for quality investment opportunities to put you capital to work.

Now the first one is obvious and what we talk about all the time on Savings Toolbox, offering numerous encouragements and strategies of how to be sure you’ve got that safety account ready to protect you when you need it.

The problem with many people at that point is they tend to keep filling up these savings accounts with money because they aren’t sure what to do next.

Well, once you have reached your savings goal for the purpose of having a safe financial cushion to work with, at that time it is important to move out of the safety mentality into an investment mentality.

It’s a perfectly good strategy to have your safety money in a low-interest bearing account because it’s purpose is to buy you time when unexpected financial emergencies arrive; it’s purpose isn’t to build you wealth with solid returns, but to protect your wealth in times of trouble, by not forcing you to tap your important investment money.

The biggest challenge once you have you money set aside is to change from a safety mindset to a wealth-building mindset. Neither one is right or wrong, they just need to be applied in the right circumstances.

Probably the biggest reason we keep funds in low-interest accounts is they’re the simplest and most easy to understand, the most safe, and we tend not to want to change what we’re doing, as familiarity becomes a friend we don’t want to abandon.

The point of this article isn’t to come up with investment ideas concerning what to do with your money once you have a financial cushion, rather it’s to help you move out of one mindset into another, so you will start to break out of your pattern and into a new one.

Once you reach you savings goal there’s no reason in the world to continue adding to it. The major reason for that is because inflation will eat away at its buying power and you’ll never build wealth with tiny interest rates.

This doesn’t mean to panic and move your money for the sake of moving it, what it means is sit on that money available for investment with an eye toward waiting for the right deal to come along. Once it does, then pounce on it.

Savings accounts aren’t ends in themselves, they should only be a holding place for money waiting for good opportunities to come along. Excluding your money set aside for crises, there should be no other purpose for putting and holding money in a savings account other than for the purpose of investing it at opportune times.