A financial windfall can happen in many ways. Maybe you just came into an inheritance or a life insurance settlement. Or you got a sign-on or holiday bonus at work. Or your company just IPOed. Maybe you sold your house and you aren’t planning to buy another one right away (or you don’t need all the money from the sale to buy your next place). Or maybe you won a really big scratch-off lottery ticket that came in a birthday card. Hey, it could happen …

No matter how you got it, you have a big chunk of cash waiting to be put … somewhere. Now it’s time to choose what to do with it. What is the best thing to do with a lump sum of money? That can feel like a big decision, but it doesn’t have to be a hard decision — not when you have a plan. Here are the smartest steps to take next so you know you’re making the most of your newfound wealth.

What to do with a large sum of money

Step 1: Don’t feel like you have to rush

Especially if this large sum of money came to you for a really emotional reason, like the death of a loved one, you might feel a lot of pressure to do the “right” thing with it. You might also have a lot of opinionated people giving you a lot of opinionated opinions about what that looks like.

But if you’re feeling overwhelmed, that’s a) understandable, and b) OK. Ignore those people and stick the money in a savings account for a few weeks (or months) until you decide what to do next. It might also be worth talking through your options with a financial planner, like the CFP® pros on Ellevest’s all-women team who can help you figure out how this money can best be used toward goals.

Step 2: It’s OK to spend a little

It’s your money; don’t feel guilty about spending it. If you want to use some of the lump sum to replace your coffee table, or upgrade some pieces of your work wardrobe, or pay the security deposit on a new apartment, or go on vacation, then do it. Seriously. We’re here for it.

Step 3: Pay off high-interest debt

After having a little fun with your financial windfall, put it to work. Focus on paying off  debt with interest rates 10% and above first, in order from highest interest rate to lowest. That is, follow the debt avalanche method. For any debts with interest rates less than 5%, you can simply make minimum payments. (At this point, you’re better off investing vs paying off debt aggressively.)

Step 4: Build up your emergency fund

Once your high-interest debt’s paid off, aim to save three to six months’ worth of take-home pay in your emergency fund. Keep it in a place that has zero investing risk, like a savings account, because when you need it, it’s gotta be there.

Step 5: Save for short-term goals

For money you’re planning to use soon — for a vacation, a major purchase, or a career break — it’s probably not worth exposing your money to the potential volatility of the stock market. If you’re going to need it within one or two years, we recommend keeping your financial windfall in a savings account instead.

Step 6: Invest it

Historically, investing can be more powerful than saving up your money in a savings account. That’s why we recommend investing for your big, long-term goals, like retirement, education for your kid(s), or growing your wealth (even more!). To make the most of your large sum of money, you have two options. You could either invest it all at once — a method called lump-sum investing. Or, you could invest a little at a time, bit by bit — a method called dollar-cost averaging. There are pros and cons to each:

• The pros of lump-sum investing your financial windfall: Historically and over the long term, investment markets have trended upward. Getting your money in ASAP means you can (hopefully) take advantage of that trend sooner rather than later. Even if you were to invest the day before a downturn, your portfolio would have the chance to recover as the market recovered (as long as you left your money invested during the volatile market).

• The cons: Yeah, you could lose a lot of your investment portfolio’s value if you happened to put all that money into the market right before a downturn. But the reverse could also happen — you could invest all your money right before a big market upswing. There’s no way to predict what'll come next.

• The pros of dollar-cost averaging your financial windfall: Dollar-cost averaging is meant to help avoid the risks of lump-sum investing. The gist is that you’d end up investing on some good days and some bad days, in some good markets and some bad markets. But over time and the long term, it'd all average out to mirror the overall performance of the market.

• The cons: We agree with the famous line “the best time to invest was yesterday.” That’s to say, the longer you wait to invest, the more you could lose out on the benefits of the market (mainly, that historic upward trending we just mentioned and compounding).

So, what’s the best way to invest a lump sum of money? Well, nobody can predict the future, but studies say use lump-sum investing. The cost of waiting to invest has historically just been too high. If you’re particularly nervous about investing all at once, though, dollar-cost averaging is still a solid choice. (In fact, we really like the way that investing consistently with dollar-cost averaging builds good investing habits, and keeps people from making emotion-driven decisions to hang on to their money now and try to “time the market” later.) No matter which method you choose, the important part is that you invest your large sum of money.

Want personalized support to make the best decisions with your financial windfall? Book a free, 15-minute call with a financial planner on Ellevest’s all-women team and feel more confident about what’s next right away.

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