Receiving an extraordinary amount of money is rare, so it’s best not to make hasty decisions.
Beyond the initial urge to spend it, it’s a great opportunity to improve your long-term financial health.
But… where to start?
1. Take a Breather
Getting an extraordinary sum, as the name suggests, doesn’t happen often. So, don’t rush.
First rule: don’t make hot-headed decisions. The larger the amount, the more advisable it is to take some time to adapt to your new situation. In the case of an inheritance, the legal process itself takes time—use it to reflect. The same applies to a bonus. Impulsiveness is the worst enemy of sound financial decisions.
2. Assess Your Financial Situation
Once you’ve taken that breather, start addressing some basic questions with fairly straightforward answers.
Run a quick check-up:
- Do you have debts? If so, analyze their costs and think about prioritizing or canceling the most expensive ones. It’s not essential to cancel all of them. Keeping some leverage and liquidity can make sense if you’re paying competitive interest rates, e.g., on a mortgage.
- Do you have an emergency fund? If not, it’s time to build one. It’s considered a minimum of three to six months’ worth of emergency funds. Consider how much your emergency fund should be based on your situation.
Once these basics are covered, think about how to maximize the money received.
- Are you already investing regularly? What’s your time horizon? What financial goals do you have?
At this point, it is common for doubts to arise about how to continue.
3. Split the Money into Goals/Horizons
You can seek financial advice, but you can also make progress on your own. An effective strategy is to allocate percentages to goals or time horizons:
- A portion to enjoy: You can certainly allocate a portion to your dream trip or any other expense that makes you happy.
- Once your emergency fund is covered, it’s important to prioritize long-term investments. Typically, retirement or financial independence should be considered. This is for two reasons: because they’re harder to achieve, and because time and compound interest are on our side.
- And perhaps a portion for medium-term goals (a home, education, a big trip, etc.).
At inbestMe, we stress the importance of segmenting goals. If you don’t have defined ones, think in terms of time horizons. That way, it’s easier to choose the right portfolio and risk profile.
4. Don’t Let It Sit Idle
Receiving a bonus or inheritance can be overwhelming. Once reflection time is over, it’s important to take action. Leaving money in a checking account means losing purchasing power to inflation. Investing wisely, with diversification and aligned with your goals and risk profile, is key to turning this windfall into lasting well-being.
You can then consider more technical questions, such as:
- Is it the right time to invest?
In general, it’s better to stay invested than to try to time the market.
Data shows that lump-sum investing has often outperformed market timing.
We’ve also discussed why market timing is riskier than it seems.
But from a psychological perspective, it may make sense to invest a portion (say 50%) and invest the remainder (the other 50%) in a systematic investment plan with recurring contributions.
5. Invest with Purpose and Goals
An inheritance or bonus can be life-changing. Use it to plan your future better: travel, children’s education, starting a business, buying a home… But don’t forget the long term: retirement or achieving financial freedom (also known as FIRE).
At inbestMe, we help turn one-time decisions into lasting financial strategies. If you’ve received an extraordinary sum and don’t know where to start, we’re here to help.
