While driving home on my lunch break the other day, I happened to turn on the radio and catch a little bit of The Dave Ramsey Show. One of the callers had just received a windfall of money and needed some advice. The lady had recently suffered the loss of her husband, and he had left her with a million dollar life insurance policy. She was not very confident in her abilities to handle that amount of money, and she certainly did not want to squander it. After hearing her story, Mr. Ramsey gave her some very simple words of advice: don’t do anything. This advice may seem shocking to some, but I thought it was absolutely brilliant.
As most of you know, my day job is in the funeral industry, and this is the exact same advice that I give people on a daily basis. There are many well-meaning people – and some not so well-meaning – out there who are eager to help you spend or invest your new found windfall. However, when going through a period of grief, it is always best to hold off making financial decisions until the initial sting of the loss has worn off. (That goes for most major decisions, not just if you are receiving a large insurance death benefit.) We simply aren’t thinking clearly during these times, and it can lead us into making poor decisions. If a financial decision seems good right now, chances are it will still be a good decision down the line.
In fact, I would suggest that anytime somebody receives a windfall – whether that is through life insurance, an estate, or the lottery – they should stop and do nothing. Whether you are experiencing grief due to a loss or extreme excitement due to an unexpected win, your emotions will be clouding your judgement. Once you have that money in your hand, it is not going to go anywhere unless you let it leave. A good investment now will usually still be a good investment 6 months from now. There is no reason to rush into anything that you do not understand. Doing so is a great way to see your sudden windfall dwindle to zero.
So, what should you do with the money? There are a lot of great options, from savings accounts to high value fixed rate bonds. Here are a few options to help you keep that money in your pocket!
Whenever you receive a windfall, the first thing I would do is pay off all of my debt. Once you’ve done that, you want to protect that money in the best way possible. Therefore, I suggest that you take the money and put it into a good bank until the initial shock has worn off. Savings accounts are great for this. Here in the U.S., most savings accounts are federally insured by the FDIC up to $250,000, which makes them one of the safest places that you can put your money.
Depending on the size of the windfall, you may want to split it up and put it in several different banks. There are tons of great banks around. You can look for a local bank or a national chain. You may even decide to put some of the money in an online bank. For our readers in the U.K., Birmingham Midshires Savings is one great option for savings accounts, along with a multitude of other banks.
Money Market Accounts
Money market accounts are similar to savings accounts, and you can find them at most any bank in the U.S. These types of accounts are generally insured by the FDIC and usually pay higher interest rates than savings accounts. However, they also require higher minimum deposits and limit the number of transactions that you can make each month. Depending on the size of your windfall, this may be a great way for you to keep your money in a very conservative investment vehicle while still earning a decent interest rate.
Certificate of Deposits
You can walk into almost any bank and be able to put your money into a Certificate of Deposit (CD). CD’s are great because they also offer insurance protection from the FDIC with higher interest rates than a savings account. However, you will not have access to that money until the CD’s maturation date – which is generally 3, 6, 9, 12, or 24 months, depending on the investment you choose. In an emergency, you can take your money out of the CD sooner. However, you will be hit with a stiff penalty.
Fixed Rate Bonds
If you are looking to not do anything with your windfall for several years, high value fixed rate bonds may be another option for you. With a bond, you are essentially buying debt (giving a loan) to the issuer (such as a local or federal government), which makes them a relatively conservative investment. The interest rate is fixed and is therefore not subject to interest rate fluctuations. However, fixed rate bonds usually have a maturity schedule of several years. Thus, they do hold the risk of not keeping up with inflation. Furthermore, in the United States, fixed rate bonds are not insured by the FDIC, which does add another element of risk.
As you can see, there are a lot of ways to protect your windfall from disappearing. Before you do anything, make sure that you understand the investment that you are making. Be sure to keep your emotions out of it. The best way to do that is to take your time, get over the initial period of shock, and understand your investment. That will give you the best chance of being able to make your windfall work for you now and in the future.