It’s a cliché, but it’s also true: every cloud really has a silver lining. This was hammered home to me after I was recently rammed into a car accident. I wasn’t hurt, but it was a scary experience, and the amount of paperwork required afterwards was overwhelming at times.
After I filed my claim and it was processed, my auto insurer deemed my car a total loss. But before I had time to mourn the fact that I was carless, yet again the silver lining came: I was reimbursed for part of my car insurance premium for the month, and I received a check for $11,000, which my auto insurance company concluded my 2014 Chevy Cruze was worth. Even though the settlement was not a Powerball, an amount to “quit my job”, it made me think, because I had to decide what to do with it.
Back to basics
I knew I didn’t want to run out and lock myself into a car loan for another car. With prices for new and used vehicles always being very high, the addition of a payment for the car did not appeal to me, especially since my old car was reimbursed. Also, the Washington, DC metro area has a public transportation system that I used regularly before I had a car. So I did what I had wanted to do for a while: I added some money to my emergency fund.
You generally want to have at least three to six months of expenses stored in a dedicated savings account in case of job loss, medical emergency, or expensive auto repair bill. (Here’s more information on where to find emergency money.) However, with inflation around 9%, you should store more of it in the account.
Increasing your savings by about 10% or more will give you more protection in an emergency, says Samantha Gorelick, certified financial planner at Brunch & Budget, a financial planning company. You need to be prepared to cover your expenses at high prices if inflation continues, she says.
If you don’t have an emergency fund, an unexpected windfall is a good way to create one. Make your money grow by parking it in an interest-bearing savings account. Rates go up for savings and money market accounts at many financial institutions. (For current rates on top-performing accounts, go to Depositaccounts.com.)
Another personal finance basic to consider: Pay off any credit card debt you have. For those with a balance, using even a modest windfall to pay it off could put you on a better financial footing and potentially boost your credit score.
In my case, although my revolving balance is usually between $1,000 and $3,000 and my credit rating gives me bragging rights, paying off some of that debt alleviated some financial anxiety. If you have balances on multiple credit cards, pay off the card with the highest interest rate first and go from there.
If your debt is mostly related to student loans, consider using some or all of the money to pay off your loan balance. The moratorium on federal loan repayments has been extended through the end of the year, but it does not include private student loans. Although the Biden administration is forgiving some federal student loans, depending on the size of your loan, you may still have to make repayments when the last moratorium ends.
Once you’ve taken care of your adult needs — or if your finances were already in great shape — you can use your windfall to fund something fun, like an excursion you’ve postponed because of the pandemic. If you’ve been dreaming of vacationing in Europe, now is the perfect time to go, as the weak Euro has offset the usually high cost of a trip there.