Step 9 Toward Living a Debt-Free Life: What to Do with Windfalls!

Earlier this year, we brought you the first eight of twelve steps toward living a debt-free life.

Sometimes, money lands just in your lap — and it's the best feeling! Whether it's a tax refund, a bonus from work or winning a prize, it's definitely nice to get some unexpected cash.

But before you treat yourself to that new TV, clothes or something else, remember to stop and think about the best way to use those funds.

First, remember that you may have to pay taxes on that windfall. Sometimes, taxes are taken out automatically — especially if it came from a bonus at work — but sometimes taxes are not taken out. In that case, remember to set aside about 25 percent for taxes to avoid an unpleasant tax bill next year.

The rest of that money should go toward paying off whichever debt you've decided to really focus on eliminating.

Earlier in this series, we talked about the "snowball method" of paying off debt. This method asks you to put any extra money you have every month toward paying off one debt, such as the one with the lowest balance or the one with the highest interest rate. (Also, remember to keep up with the minimum payments on all other debts so you don't get behind.)

Then, when that debt is paid off, put that same amount of money, plus some more, at your next debt target. The amount of money you're putting toward your next debt builds up like a snowball.

Your windfall can make a real dent in your targeted debt, moving you closer to living the debt-free life that you're working toward! As a review, we've been bringing you one step closer to living a debt-free life, giving you a new tip every month since January.

Below is a review of where we’ve been this year. Click on the step number to read the full article and learn more.

•  Step 1: Take stock of your debt by writing down exactly how much you owe to whom, plus information on payment amounts and interest rates. Put that information into a spreadsheet.
• Step 2: Assess your spending, and work hard on not incurring any more debt than you already have.
• Step 3: Call your credit card and loan companies and ask if you can have your interest rates lowered!
• Step 4: Create an emergency fund so that unexpected expenses like car repairs or medical bills don't completely derail your finances.
• Step 5: Organize your finances by really keeping track of every expense during the course of the month — from that morning latte to utility bills. It’s critical that you know where your money is going so you can get more control over it.
• Step 6: Trim your expenses by taking a look at the money you spend and figure out what you can cut — from subscriptions to take-out dinners. Put that money toward paying down your debt, instead.
• Step 7: Start paying down more debt using the "snowball" method.
• Step 8: Find ways to make more money — and throw it at your debt, too!
• Step 9 is this month's tip, above, about what to do with an unexpected windfall. Stay tuned for next month's step on getting yourself out of debt and onto the road to a less stressful, happier financial future.

Have questions? Did you know that our certified financial counselors are available to meet with you at no cost? We're dedicated to your financial well-being and want you to succeed. Setting up a meeting is easy - just visit our website, request a free consultation, and we'll be in touch soon!

If you would prefer to learn at your own pace, we have a resource for that too! Visit Banzai, our online adult and youth financial literacy program, to learn more about methods to pay off debt and other financial topics.