A financial windfall in your 20s presents both a challenge and a powerful opportunity to build wealth early. Let’s say you’re 26, with no credit card debt, a $27,000 car loan at 8% interest, and minimal monthly expenses beyond rent and insurance. After taxes, you have $36,000 left over from the windfall to do what you want with.
The decisions you make now could shape your financial future. So, what should you do with the money?
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Should you pay off your car loan?
Since you have $27,000 in car loan debt, paying off your $27,000 car loan might feel like the most obvious choice to make — especially since you have a fairly high interest rate at 8%.
It makes good financial sense. Eliminating the debt would earn you an immediate 8% return on your money with zero risk. That’s especially appealing since auto loan interest isn’t tax-deductible.
Let’s say that you originally borrowed $32,000 on your car at 8% using a 48-month loan, and you have 40 months left to pay with a balance of $27,348.42. If you paid off your full balance next month, you’d save around $3,899.01 in interest. Getting the definite 8% ROI from avoiding auto loan interest is likely worthwhile.
You could then redirect your former monthly car payment into savings or investments.
Should you invest the windfall?
Given how high the interest rate is on the auto loan, paying off the car loan might be the best decision, but you could choose to keep making payments on your vehicle and instead invest all $36,000 of the windfall.
Alternatively, you could pay off the car loan, and then invest the remaining $8,651. Either way, putting at least part of the windfall into the market can help your money grow.
Although the stock market isn’t risk-free, you can generally expect around a 10% average annual return over the long term by investing in an S&P 500 index fund.
Read more: You don’t have to be a millionaire to gain access to this $1B private real estate fund. In fact, you can get started with as little as $10 — here’s how
Other options to take advantage of the windfall
Whether you choose to pay off the car or invest part of the money, there are other important financial considerations, too. For example:
- Retirement contributions: If you haven’t maxed out your 401(k) or IRA for the year, consider using the windfall to boost your long-term savings.
- Emergency fund: Having three to six months of living expenses in a dedicated fund can protect you in case of a job loss or unexpected expense.
- Short-term savings goals: If you’re planning to buy a home or make another big purchase in the near future, you may want to keep some of the money in a high-yield savings account.*
It may also be worth speaking with a financial advisor to create a personalized strategy, especially when dealing with a large sum of money at a young age.
With the right approach, a $50,000 windfall could be more than just a lucky break — it could be the foundation for a stronger financial future.
What to read next
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- Here are the 6 levels of wealth for retirement-age Americans — are you near the top or bottom of the pyramid?
- Here are 5 ‘must have’ items that Americans (almost) always overpay for — and very quickly regret. How many are hurting you?
- How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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