At some point in our lives, many of us are lucky enough to earn, inherit or receive a cash gift or refund. Whether it’s $500, $5,000 or $15,000, that extra cash, which may not have been planned for, could ultimately make a big difference in your personal economy if properly utilized.

Whether you are expecting an inheritance, bonus, retirement plan payout, insurance settlement or a tax refund, be sure to leverage the extra cash you are going to receive in the best way possible. Remember, that with some of these cash windfalls, taxes could be due on the payment (e.g. retirement plan distributions) so make sure you first put away enough money to pay any taxes that may be due. The key is to resist the temptation of immediate gratification by spending this money on short-term goals like a vacation or a big screen television. Instead, think about how you can put your money to work for you long term, making a real difference in your financial future. Following are some recommendations and ideas for you to consider.

Put a Dent in Your Debt

According to the recent American Express Financial Advisors Personal Economy Index Survey, too much debt is the number one financial concern of more than 40% of Americans. If you are like the millions of Americans carrying a balance on your credit cards, the first option you should consider is utilizing your newly found cash to pay off that debt. If you have a $2,000 credit card balance charging 18% interest, and you make the minimum payments, it will take you almost eight years and over $4,000 in interest alone to pay it off.

Build an Emergency Fund

As a general rule, it is recommended that you set aside three to six months of living expenses to carry you through an adverse event, such as a layoff or illness. If you don’t already have an emergency fund, your bonus, inheritance or tax refund can help you get one started. Be sure to keep the money in a liquid investment, such as a money market account or a short-term CD, so it is available to you on short notice. Most emergencies don’t come with great warning so you may need access to your cash quickly.

Think Long Term

If you have a retirement plan, is it on track? Consider putting that cash in to an Individual Retirement Account (IRA). In 2004, you can put in up to $3,000 and that money will grow tax deferred until you withdraw it at retirement.

While there are annual contribution limits to most tax-deferred retirement plans, you can put your cash to work for the later years by adding suitable securities to your taxable accounts once your qualified plan contributions are made.

For example, if you invest $2,090 in 2004 (the average amount of a tax refund this year) and make annual investments of the same amount for each of the next 19 years, the total investment could eventually be worth around $130,000 in 20 years if compounded with a 10% return, pre-tax (representing the long-term return of common stock investing)*. However, before you make investments in the stock market, be sure that money is not needed in the next three to five years. Because of stocks’ inherent volatility, they should be considered for long-term investing only.
* This illustration is hypothetical and is not meant to represent any specific investment or to imply any guaranteed rate of return.

Pay off your Mortgage Early

An extra $2,000 payment each year on a $200,000 30-year mortgage with 7% interest will knock off more than eight years of payments and save you nearly $90,000 in interest. Also, if you have been thinking about refinancing your home mortgage to take advantage of record low interest rates but didn’t have the cash to cover closing costs, your tax refund or bonus can perhaps cover those fees.

Jumpstart Education Savings

A lump sum of cash can put your college savings plan on the fast track. With high annual contribution limits and a wide variety of investment choices, a 529 plan may be an excellent way to invest a substantial one-time amount for education. Go to www.savingforcollege.com or www.americanexpress.com for more information.

Be Charitable

You might also consider using your windfall to help the less fortunate. Not only will you do something worthy for someone in need but you may also be able to deduct the donation on your tax return. Be sure to get a receipt for your donation from the charitable organization.

Get Help

Before you decide how to spend your lump sum of cash, review your family’s short and long-term goals and consider how the money could provide the most progress toward reaching them. Creating a plan for your newly found cash and balancing many different goals simultaneously can be challenging. Seek the help of a qualified financial advisor who can help you create a comprehensive financial plan.

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