987. Laura answers a listener's question about how to successfully manage a lump-sum cash windfall.
987. Laura answers a listener's question about how to successfully manage a lump-sum cash windfall.
Find a transcript here.
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Hey, friends, and welcome back to the Money Girl podcast! This is Finance Friday, a special edition of Money Girl, where I answer your burning money questions.
I'm Laura Adams, an award-winning author who's been bringing you personal finance tips every week since 2008, with over 44 million downloads. I love hearing from you, so if something finance-related is on your mind, leave me a voicemail at 302-364-0308 or email me your question or comment via my contact page at LauraDAdams.com.
Today’s question is a short email from Goarete, who says, “I will get $500,000 in January 2026. How can I make it make money for us?”
Thanks for your question, Goarete! Knowing what to do with a large cash windfall can be confusing, but it's a terrific problem to have. I’ll review how to manage a lump-sum cash windfall wisely, based on your financial situation, age, and risk tolerance. By the way, these tips apply even if you don't have lots of extra cash, so stay with me!
6 tips to manage a large windfall
I understand that Goarete is anxious to put a cash windfall to work to “make it make money” right away. First, it’s critical to ensure you have a solid financial foundation that protects you regardless of what happens in the economy or financial markets.
I’ll review six tips for managing a cash windfall to avoid excessive risk and improve your long-term financial security.
1. Understand your financial situation.
In my most recent podcast no. 986, "Your Roadmap for More Wealth in 2026," I recommend regularly using a simple financial tool to evaluate your finances: a Personal Financial Statement (PFS). It’s a spreadsheet I created and share with podcast listeners and newsletter subscribers that makes it easy to calculate your net worth and understand your financial situation.
To get your copy of my PFS template, it's a free gift when you subscribe to my newsletter, The Money Stack, at LauraDAdams.com. Once you download it, you'll find a tab to list your assets, such as real estate, cars, jewelry, household possessions, bank accounts, taxable investments, and retirement accounts.
My PFS also includes a tab to list details of your liabilities, including mortgages, car loans, student loans, personal loans, and credit cards. A separate tab calculates your total liabilities and subtracts them from your total assets. The resulting number (positive or negative) is your net worth.
Calculating your net worth provides a comprehensive view of your financial position. For instance, a negative net worth tells you that your liabilities exceed your assets. But a positive net worth shows that the value of what you own exceeds what you owe, which should be your goal.
Before you or Goarete invest a cash windfall, complete your PFS to determine whether you should put some or all of it to a better use. For instance, you may need to boost your emergency savings or pay down high-interest debt to improve your financial well-being. Otherwise, if you need cash, you could be forced to sell investments at the wrong time, causing you to lose money.
2. Fund financial safety nets.
Once you review your assets and liabilities, ask yourself if you have the right financial safety nets in place. These are essential for managing unexpected expenses and hardships, such as medical bills, job loss, or reduced business income.
As I mentioned, keeping emergency savings is critical. A good target is to maintain approximately three to six months' worth of your living expenses–such as housing, food, utilities, healthcare, and debt payments–on hand.
For example, if your monthly living expenses total $4,000, consider keeping $12,000 to $24,000 in FDIC-insured savings. However, you may need more or less depending on factors such as the number of breadwinners in your household, your income stability, and financial goals.
Another financial safety net is insurance, such as health and disability policies. Even a quick trip to the emergency room for an illness or accident could cost thousands of dollars. Being uninsured or underinsured could leave you financially devastated after an accident or illness.
Plus, if you have family members who depend on your income, having life insurance protects their financial futures. So, if you don't have a healthy cash reserve or various insurance coverages, consider using some or all of a windfall to shore up your financial defenses before investing your extra cash.
LISTEN ALSO: Navigating a complex health insurance landscape
3. Choose the best investments.
Once you have financial safety nets in place, you’re in an excellent position to invest excess cash so it works for you. However, the investments you choose should align with when you may need to spend the funds.
Let’s say you have short-term goals, like buying a car or a home within a year or two. In that case, consider placing those funds in a low-risk, predictable-return option, such as a certificate of deposit (CD). Or you may prefer an investment that generates monthly income to supplement your lifestyle, such as a dividend-paying mutual fund or exchange-traded fund (ETF).
However, if you don’t need the cash in the short term and want it to grow for at least five years, such as for a young child’s education or retirement, consider investing it in a low-cost index fund, such as one that tracks the S&P 500, the gold standard for passive growth.
It’s reasonable to expect an average annual return of 7% with a total stock market index fund. That means a $500,000 investment could double to $1 million in about ten years without adding another penny!
If you want to be an active investor, you might use a cash windfall to purchase a physical asset, such as real estate. A rental property offers tax advantages, potential appreciation, and cash flow if appropriately managed. However, you should analyze the income and expenses of a possible property extremely carefully, especially if you don’t have experience in real estate investing.
LISTEN ALSO: How can I become a confident investor?
4. Use the best investing accounts.
Goarete didn’t mention having a workplace retirement plan or ask about investing in a taxable or tax-advantaged account. So, I’ll assume they don’t have one or are self-employed.
Unlike retirement accounts, taxable brokerage accounts require you to pay tax annually on any capital gains (profits from selling an investment for more than its purchase price), interest, and dividend income. The tax amount depends on how long you own the investment and your tax bracket.
The upside of taxable accounts is their flexibility. Unlike retirement accounts, they don’t have income requirements, annual contribution limits, early withdrawal penalties (before age 59.5), or required minimum distributions.
However, when you purchase investments using a retirement account, such as an IRA or a SEP-IRA (for the self-employed), you build wealth for retirement and reduce taxes. I recommend that Goarete open a retirement account and fund it first before investing through a taxable brokerage account.
Everyone with earned income (even minors) qualifies for a traditional IRA. You make pre-tax contributions and defer taxation until you make withdrawals in retirement. There are no income limits to qualify. If you're married and file taxes jointly but have no income, you can invest based on your spouse's income.
For 2026, you can contribute up to $7,500 or $8,600 if you're over age 50 to a traditional IRA. The annual contribution limit is the same for a Roth IRA, but it has a qualifying income limit.
For 2026, you must earn less than $168,000 as an individual taxpayer or $252,000 as a married couple filing taxes jointly to make Roth IRA contributions. With a Roth IRA, you must pay taxes upfront on your contributions; however, you can make tax-free withdrawals of your original contributions and account earnings in retirement, which is a huge benefit.
In addition to investing through a traditional or Roth IRA, you have more account choices when you're self-employed. Two popular accounts are a SEP-IRA and a solo 401(k), which have higher contribution limits, up to $72,000, based on your earnings and age.
ALSO READ: 10 IRA Facts Everyone Should Know
5. Decide on investment timing.
You might also wonder when to invest a cash windfall. For instance, is it better to invest the entire lump sum or to use a dollar-cost averaging (DCA) strategy?
DCA is investing a consistent amount at regular intervals, such as monthly or bi-monthly. It's most commonly used for relatively volatile investments, such as index, mutual, and exchange-traded funds (ETFs), where the price can vary widely each time you buy more shares.
If you're enrolled in a workplace retirement plan, such as a 401(k) or 403(b), and have a flat amount or percentage of your paycheck getting contributed, you're already dollar-cost averaging.
By sticking to a DCA strategy over the long term, you may cut the risk of market volatility. It helps smooth out the impact of market fluctuations on your investment portfolio, making you less vulnerable to bad market timing. In other words, if you invest a lump sum when a fund's price is at an all-time high, you'd lose money and never have the chance to recover.
Plus, DCA can be more cost-effective if you typically don't have excess cash. It can also make investing less emotional if you focus on how much to invest rather than on the price of an investment from week to week or month to month. Once you choose an investment, its price doesn't matter because you buy it regularly, whether it's up or down.
The downside of DCA is that you could miss out on a massive price increase compared to a lump-sum investment. Also, since the market generally rises over time, you could argue that investing a large amount earlier is better than investing smaller amounts over a long period.
In general, when the stock market is flat or declines, you'll likely come out ahead with a DCA strategy. However, when the market rises, DCA can be disadvantageous. Also, DCA doesn't remove all investing risk; you must still identify suitable investments based on your risk tolerance, time horizon, and financial goals.
Since the amount Goarete wants to invest is relatively large and the market is doing well right now, investing a lump sum may be the best option. However, gradually spreading investments across various assets is an excellent way to reduce risk. Additionally, it can be psychologically easier to invest smaller amounts over several years.
6. Get professional investment advice.
Getting a significant windfall like the $500,000 Goarete expects is life-changing. Often, large windfalls come during difficult times, such as after the death of someone close to you.
Never feel rushed to make significant financial decisions when you feel overwhelmed or emotionally unstable. There’s no downside to waiting until you feel more balanced and clear-headed.
Even if you receive a smaller amount and are unsure how to manage it or choose investments, I recommend getting professional advice, such as from a Certified Financial Planner (CFP), tax accountant, or retirement planner. They can help you understand the tax consequences of having a higher income and how to use a cash windfall to achieve your financial goals.
To sum up, before investing a windfall, prioritize safety nets such as emergency savings and insurance, and use tax-advantaged investment accounts when possible. Thanks again to Goarete for sending in this question!
Remember, you can also email me with any questions or comments via my contact page at LauraDAdams.com. While you’re there, sign up for The Money Stack, my Substack newsletter. You can subscribe for free or support the show by becoming a paid member and getting access to my live educational and Q&A events!
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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