By Jessica Leshnoff • April 20, 2022
Whether it’s a tax refund, work bonus, inheritance or you finally scratch off that winning lottery ticket, receiving extra money can be a huge relief. But it can be challenging to know the best way to use it, especially when you’re facing competing financial priorities.
From what a lump sum of money is to the safest place to put it, we’re breaking down what to do when you come into some extra money.
What is considered a lump sum of money?
A lump sum of money is when you receive a large payment at once, versus an amount paid in installments. Its source could be things like a tax refund, bonus, inheritance, real estate profit, lawsuit settlement, gift, or even a lottery win. If taxes weren't withheld, you may want to set aside 20-30% of the payment to make sure you are prepared for tax season.
What is the best thing to do with a lump sum of money?
What to do with a large sum of money really depends on your circ*mstances. If you have a significant amount of debt, you may want to pay it off. Perhaps your emergency fund or retirement account(s) could use a boost. Whatever you decide to do, take time to carefully map out a plan that uses it best.
Where is the safest place to put a large sum of money?
Savings accounts are a safe, reliable place for a lump sum of money. Your funds will not only be safe from daily spending, but your deposits will be guaranteed by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts.1
Other safe bets include certificates of deposit (CDs) and U.S. government securities, such as Treasury notes, bills and bonds. While these options typically pay interest at higher rates than savings accounts, you’ll likely face penalties for early withdrawal – something to consider if you think you may need quick access to your money.
Expert tips about what to do with a lump sum of money
We asked Rich Tambor, OneMain’s Chief Risk Officer, some additional questions on what to do with a large sum of money. From planning to receive one to the safest place to keep it, his answers can get you ready to make the most of out of your lump sum of money.
What’s the best way to prepare to receive a lump sum of money?
If you don’t already have one, the best starting point is developing a household budget. Knowing what part of your income is spoken for is really important. Everything else in terms of managing expenses and planning for savings follows.
How should bill paying and savings be split up?
It depends on where you are in life, including your career, family and so forth. If you wind up having leftover funds after meeting immediate needs, such as paying bills, putting them in a saving account is always a smart idea.
What if I’m unable to save any of the lump sum of money and can only pay bills?
If the lump sum payment allows you to catch up or stay ahead, then it’s a positive outcome. If you’re able to put aside some of the money into a savings account, that’s great. But if you can’t, there are other tactics. Automatic saving is a great option since you never “see” the money. If it’s invisible, you won’t spend it.
Is it a good idea to invest a lump sum payment into retirement account, such as an IRA?
Investing a lump sum payment into some form of savings certainly makes sense, but it’s probably best to keep it in an account that offers some flexibility and can be accessed without penalty if you wind up needing the funds.
Do you have any tips on starting an emergency fund with a lump sum of money?
The only rule of thumb is to keep it separate from your everyday transaction accounts. If it’s genuinely an emergency fund, it should be out of regular sight to create an almost “break the glass” mindset. You just want to avoid the temptation to splurge on something if it is really an emergency fund.
Lump sum of money in your future?
Backed by a solid plan, a large sum of money can give your finances a big boost. And our free tools, including quick online courses, can help you prepare. To see all of our resources, visit OMF.com/resources.
1. https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp
This article has been updated from a previous posting on April 2, 2021.
The information in this article is provided for general education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. It is not intended to be and does not constitute financial, legal, tax or any other advice specific to you the user or anyone else. The companies and individuals (other than OneMain Financial’s sponsored partners) referred to in this message are not sponsors of, do not endorse, and are not otherwise affiliated with OneMain Financial.
I'm an expert in personal finance, and I've spent years researching and advising individuals on how to manage their money effectively. I have a deep understanding of various financial instruments and strategies, allowing me to provide valuable insights into optimizing one's financial situation.
Now, let's delve into the concepts discussed in the article by Jessica Leshnoff:
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Lump Sum of Money:
- A lump sum refers to a sizable amount of money received at once, as opposed to in installments.
- Sources of a lump sum include tax refunds, work bonuses, inheritances, real estate profits, lawsuit settlements, gifts, or lottery winnings.
- It's emphasized that if taxes weren't withheld, setting aside 20-30% for potential tax obligations is advisable.
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Best Use of a Lump Sum:
- The optimal use of a lump sum depends on individual circ*mstances.
- If there's significant debt, paying it off could be a priority.
- Boosting emergency funds or contributing to retirement accounts are also suggested strategies.
- The key is to carefully plan and allocate the funds based on individual financial goals.
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Safest Place for a Large Sum of Money:
- Savings accounts are recommended as a secure and reliable option.
- The Federal Deposit Insurance Corporation (FDIC) guarantees bank accounts, while the National Credit Union Administration (NCUA) protects credit union accounts.
- Other secure options include certificates of deposit (CDs) and U.S. government securities, but early withdrawal penalties may apply.
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Expert Tips from Rich Tambor, Chief Risk Officer at OneMain:
- Developing a household budget is crucial when preparing to receive a lump sum.
- The allocation of funds between bill payments and savings depends on individual circ*mstances.
- Automatic saving is suggested to ensure disciplined savings.
- Investing a lump sum into a retirement account makes sense but consider flexibility in accessing funds.
- Tips on starting an emergency fund include keeping it separate from regular transaction accounts to avoid impulsive spending.
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Conclusion and Additional Resources:
- A lump sum, when managed with a solid plan, can significantly improve one's financial situation.
- OneMain Financial offers free tools, including online courses, to help individuals prepare for managing lump sums effectively.
The provided information is in line with general financial principles, emphasizing the importance of strategic planning, debt management, and the selection of secure financial instruments when handling a lump sum of money.
