Got an Unexpected Windfall? What to Do with the Extra Money

by Julie Jaggernath

After getting an unexpected windfall like an inheritance, are you wondering what to do with the extra money? Before touching any of it, review your overall financial situation and aim to strike a balance between what works for you right now and your plans for the future. One of the best things to focus on first is paying down any debt and bills you’re having trouble with. This might mean consolidating debt into one payment, paying off one big bill to create some breathing room for day-to-day spending, or bringing all accounts up to date to avoid late fees, penalties and interest going forward as you resume regular payments. You may also want to top up savings for your retirement or set aside money for your children’s education. With all the possibilities this windfall opens, you may soon find yourself with more plans than money. Here are some tips to help stay on the right track:

Make Extra Mortgage Payments

If you have a mortgage, paying that down with your extra money can accelerate your journey towards owning a home with no debt – a key financial milestone. However, ask your lender what your prepayment privileges are because they will vary. Some are based on your original amount borrowed, others on how much you still have to repay. With some mortgage lenders, you can prepay a lump sum at any time throughout the year; with others, you must follow a specific schedule.

If there’s a chance you could pay the rest of your mortgage off all at once, ask your lender what the penalty would be and factor that amount into your calculations. Standard mortgage agreements in Canada have one of two penalties – a 3-month interest penalty or an interest rate differential, and typically the higher amount is the sum you’ll have to pay.

• A 3-month penalty is exactly what it sounds like. The lender will calculate how much interest they will lose over a 3 month period if you pay your mortgage out. That sum will then be added to your discharge amount.
• The interest rate differential is harder to calculate. It essentially means if you were to pay out your mortgage on the day you request, what would the lender be able to charge the next borrower for that sum of money. For instance, if you owe $25,000 and are being charged 3.1%, and the lender would lend that $25,000 to the next borrower at 1.9%, you would be charged the money they’re losing by lending at a lower rate. However, if you’re paying 1.9% and they can lend the $25,000 to the next borrower at 3.1% you’d be left with paying the 3-month interest penalty.

Ask your lender for your exact penalty amounts. If the penalty is quite big, then consider a combination of accelerated mortgage payments and lump sum payments. This will reduce your interest costs until you’re able to pay off your mortgage on the renewal date with no penalty. For example, if you can double up on your normal payment amount and make weekly payments instead of monthly, you’ll pay your mortgage down faster. Again, consult with your lender. They can help you consider options to decrease your principal as quickly as possible within the terms of your mortgage agreement.

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Open Savings Accounts that Use Your Extra Money Effectively

An important part of securing your financial future is having money to spend when you need it. Whether it’s for an emergency expense or a bigger ticket item, saving up a stash of cash to spend later helps keep you out of debt. But that doesn’t mean you should just have your money sitting in the bank doing nothing. Talk to your financial institution about savings options that would benefit you and your family.

If you don’t have a Tax-Free Savings Account (TFSA) to save for bigger or longer-term goals, then open one. If you have Registered Retirement Savings Plan (RRSP) contribution room, contribute there as well. RRSP contributions may result in a tax refund next year; rather than spend the refund before you get it, plan how best to use it towards your goals. Keep your eye out for free money too. If your employer offers to match RRSP contributions, then max those out. If you have young children, then Registered Education Savings Plans (RESPs) include grants of 20% on the first $2,500 contributed each eligible year.

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Keep Temptation Spending to a Minimum

When you suddenly have a lot of money from a windfall, it can feel tempting to spend it on everything you want right now. The same is true if you use a windfall to pay off your credit cards and other debts. Available credit can make it very tempting to spend. While treating yourself is fine, make sure that what you want doesn’t get in the way of what you know you should be doing. One of the best ways to help yourself spend less impulsively is to factor some mad money into your budget. Give each family member a set amount that they can use any way they like each month. One person might use the extra cash on several smaller expenses, another may treat themselves to a single larger purchase, and someone else might save the money towards bigger goals.

The magic behind mad money is that it’s already accounted for in your budget after all of your essentials have been dealt with. This money is simply a judgment-free way of rewarding yourself for doing a good job managing your finances on a daily basis. Giving yourself a little cash to spend frivolously helps motivate you to stick to your spending and savings plans.

When You Aren’t Sure What to Do with Extra Cash, Use It As a Learning Opportunity

Using unexpected money to kickstart better money management skills is always a good idea, especially when the windfall is an inheritance a loved one worked hard to give you. The question of what to do with the extra cash will ultimately depend on you, your current situation, and your future goals. Paying debt off will put you further ahead and make it easier to find money to save. Creating a realistic household budget and spending accordingly will help ensure that you don’t need to rely on credit to make ends meet. The future financial stability of your family is a legacy worth leaving, and if you need help with planning towards this, then a non-profit credit counsellor can offer free and confidential support. These accredited professionals can assist you with understanding your current financial situation and how you can best use your windfall to accomplish your goals.