What to do with a lump sum of money

What to do with a lump sum of money

Sometimes, you get a bit of money over time. In other times or rare times, you might get a lump sum.

What should you do with any financial windfall?

What should you do with a lump sum of money?

Is it better to invest a lump sum of money or dollar-cost average over time?

Read on and find out my takes inspired by a recent reader question.

Congrats, you have a lump sum of money. Now what?

A lump sum of money, no matter how small or large, can be a huge enabler to your financial goals or current needs.

Small sums of money can help fund savings for near-term expenses like a car or a desired vacation.

Large sums of money can be life-altering. 

With so many options and ways to spend money, I think it’s worth knowing and therefore figuring out what’s going to give you the most value for your money. Inspired by a recent reader question, I highlight some ideas on what to do with a lump sum of money.

Reader email and question (adapted slightly for the site):

Hi Mark,

Love your website, I’m a regular visitor and reader. I’ve been a dividend investor since 2001 (eek 20 years!), letting XIU dividends DRIP away and accumulate in my non-registered account, more variety in my RRSP/TFSA account where ACB (adjusted cost base) calculations are not required for myvtax returns. I’m shocked at how much advisors charge to manage people’s money and encourage anybody that asks to learn about investing or DRIP index-based ETFs.

(Mark: heck ya, tell me about it!)

My suggestion for an article is a discussion on what to do with a windfall. Pay off debt, top up TFSA/RRSP, and more come to mind. I found it was very useful to be a DIY investor because your game plan is already developed and in progress. Recently, I was able to deploy funds according to my plan and found it
pays to be on top of your investments, you already know where you are headed.

Thanks for any insights if you can do an overview on that!

Thanks for your readership and question.

I think this reader is very wise to consider how any sum of money (big or small) fits into your financial plan or roadmap. With that in mind, here are my key considerations on what to do with a lump sum of money.

1. Incorporate your new money into your existing financial plan

Odd, right: new money, old plan?

Not really. 

If you already have a financial plan in place, then this decision will be rather easy.

Any new money should already be earmarked where and how that will fit into your financial plan – enhancing your savings, accelerating your money goals including financial independence or any destination in between.

Having a financial plan will give you some objective reminders where this money could go, and why, effectively doing two very important things at once:

  1. Using your new money most effectively and tax-efficiently, and
  2. Reducing the likelihood of making a poor, emotionally-driven decision.

If you don’t already have a financial plan or know what should go into any financial plan, then consider further reading here.

What is a Financial Plan and what should it cover?

Assuming you have a financial plan or at least a good financial roadmap in mind, these might be some options for your lump sum windfall.

2. Max out your Tax Free Savings Account (TFSA)

My reader did not disclose how much new money they are talking about, so I’m going to assume it’s a small six-figure ($100,000) sum.

With that amount of money, I would absolutely encourage any adult Canadian (if they haven’t already done so) to max out his/her TFSA contributions. 

I mean, love the account and totally dislike the name! 🙂

I hope you know from reading my site the Tax-Free Savings Account (TFSA) is far more than a savings account, and unfortunately, many Canadians still cannot get over this fact. Check out these facts from earlier this year according to a Bank of Montreal (BMO) study:

  • Cash is good, but…the majority (56 percent) of Canadians polled at the time have cash in their TFSA and 29 percent say cash makes up at least three-quarters of their holdings. That’s a major loss in stock market compounding power!
  • Knowledge is power, but…while 73 percent of Canadians consider themselves knowledgeable about TFSAs, only half (49 percent) of Canadians are aware that a TFSA account can hold both cash and at least one of the other investments. There is certainly much more financial literacy in Canada needed!
  • If you don’t have investing goals how is investing going to get you there? Many Canadians primarily use their TFSA accounts for various financial goals, with 44 percent using a TFSA for retirement savings, 43 percent using it as a savings account, but just 15 percent using the account as a means to achieve financial independence as early as possible.

Full stop: while the TFSA can absolutely be used for short-term savings I believe maxing out contributions to your TFSA (or your partner’s TFSA) and investing inside the TFSA with equities can be an excellent way to build wealth – including making great use of a financial windfall. 

3. Max out your Registered Retirement Savings Plan (RRSP)

While I personally prefer maxing out the TFSA over the RRSP, for almost anyone in any income bracket, contributions and maxing out the Registered Retirement Savings Plan (RRSP) is also one of my favourite accounts to build long-term wealth with, and so I do use it!

I think with any large or modest lump sum windfall, after the TFSA is maxed out then put any tax-deferred RRSP compounding power to work.

4. Kill off mortgage debt or reduce mortgage debt so it becomes manageable

If you’re nearing retirement and still have an amount owing on your mortgage, you might want to consider dumping your lump sum windfall on your mortgage.

Debt can be crippling for many, including as inflation and interest rates run higher over time.

While you don’t need to be debt-free to be financially free, debt management is however key. 

Of course, I believe there are several reasons not to pay off your mortgage aggressively, and instead, consider an investing first/balanced approach to managing debt and investing. Here are three reasons that come to mind:

  • Don’t kill off your mortgage when borrowing costs are cheap. While I believe it’s prudent to pay down debt in any interest rate environment, one could argue that there is no urgency to kill debt if your borrowing costs are very low. Use that money to invest, instead.
  • Don’t rush to kill off your mortage if/when long-term investments should outperform low-interest rate mortgage payments. Related to my point above, by maintaining your minimum mortgage payments, and putting your extra funds into long-term equity investments, chances are you will come out ahead with investing over many investing years. Although past performance is never a perfect indicator of any future results, a diversified mix of investments over a 20-25 year investment time horizon (approximately the same period as your mortgage amortization) should deliver close to 7-8% return. I don’t see real estate getting that! This would be by far and away more money earned than any amount you’d save in interest charges by paying off the mortgage early – all things being equal.
  • Liquidity. Have you ever tried to sell a home in a few days, AND move out AND do something with that money right away? I wouldn’t bet on doing that successfully. By having your assets invested beyond your primary residence or rentals, you will have more liquidity should you need the money for something.

What to do with a lump sum of money summary

A lump sum is when you get a large amount of money at one time  – and the sources can vary:

  • An inheritance of money
  • A sale from real estate
  • Winning the lottery or another fun contest!
  • A severance payment if you lose your job/if your workplace changes
  • A life insurance payout 

Many recipients of a lump sum of money may feel a blend of shock, excitement and anxiety. That’s normal and a good problem to have…!

If you manage a lump sum financial windfall wisely, you can probably enjoy some short-term fun, take advantage of long-term investing power, pay off some debts and/or all the above. 

Have you ever received a lump sum financial gift? If so, what was it and how did you deal with it?

Further Reading:

What is better? Dollar-cost averaging or lump-sum investing?

ETFs and dividend stocks to build wealth with.

Learn why The Psychology of Money matters when it comes to mastering money management.

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

23 Responses to "What to do with a lump sum of money"

  1. Thank you Mark for this great post.
    We were in this situation back in March when we sold our rental condo here in Vancouver , having a a little over 700K in cash landing in our account overnight was a little to nerve-wracking for us 🙂 but we had in mind ahead of time what we wanted to do with the money which is maxing out both of our TFSA’s pay all our debt which it wasn’t significant help the kids maxing their TFSA’s and set aside some cash for a couple of vacations that we were having on hold for couple of years and also to donate to a charity that we both believe strongly in it.
    I believe it’s so important to insure that we can retire comfortably but also to insure that we enjoy life now before getting old and to help the kids to have a better start for their future.
    I’ve started reading a book that was recommended by Bob lai on his site which is called “Die with Zero” by Bill Perkins and I admit that it changed my thinking of the way I want plan the rest of my life.

    Reply
    1. Outstanding Gus, max out TFSAs and pay off all debt with condo proceeds; help kids, etc.

      Life is short and precious.

      “Die with Zero” by Bill Perkins is on my reading list and I hope to review that on my site soon 🙂

      In what ways did it change things for you? Do tell!

      Reply
  2. A lot depends on your age and religion.
    If you are a Buddhist and believe in rebirth you might want to bring it with you. LOL
    And then reason # 2 is it depends on your age.
    If you a re 22 and you get a lump sump there are many doors open to you – buy a house, pay off debts, invest.
    If you are 60 and the kids have flown the coup then again debt and/or invest and/or enjoy life.
    With the “older” generation (boomers) living longer you might find yourself at 70 when that lump sum pops up. Hopefully at 70 you have a fairly solid financial footing and you can figure out any possible deployment of that lump sum including straightening out you kids financial lives if they are not quite there.
    Otherwise PM me and I will help you with your problem. LOL

    RICARDO

    Reply
    1. I guess that’s fair Ricardo – but I think in most cases, people should have a plan.
      I think if you haven’t figured out where and how to enjoy some money at age 70, you might never figure it out 🙂
      Mark

      Reply
  3. Here’s a bit of a twist on the lump sum topic. In our portfolio since 2018, we’ve had 4 major take-overs (AAR.UN, ECI, NVU.UN, IPL) and done 4 major total sells for various reasons (BEP.UN, NPI, BIP.UN, GRT.UN). Each event has resulted in a lump sum of between $80k and $190k. In almost all cases, we’ve just spread all the dough around to our existing holdings and have slowly reduced our number of holdings. The two exceptions are buying GRT.UN with the AAR.UN dough and buying DIR.UN and NWH.UN with the NVU.UN cash.

    In all cases, we have “spent” the money quite quickly and have not tried to time the market.

    I guess I have become a bit of a seasoned veteran on the handling of lump sums. 🙂

    Ciao
    Don

    Reply
  4. When I received an inheritance from my mom I used the money to buy a lakefront 650 square foot townhome an hour drive from my home. I invested the rest in mutual funds and use the income from them to pay the yearly expenses of my townhome. The townhome is up almost 200K in six years so an investment I can enjoy and get some nice capital appreciation to boot.

    Reply
  5. I have never regretted paying down non-deductible debt. Mortgage would be my number 1.

    A hybrid approach would be to at least do something Smith-Manoeuvre-like, turning your non-deductible debt into deductible debt.

    Reply
      1. I think the “typical” Smith Manoeuvre gradually builds up a leveraged portfolio as you build up equity in your home. I had already paid off my house. I re-mortgaged the house to seed my non-registered investment account, all in one big swoop.

        Reply
        1. Yes, that’s typical. Most “Smith” folks I know do not pay off their mortgage in their 30s, 40s or eveen 50s.

          That’s not for me. I want to have a sizeable taxable portfolio churning out dividends without any debt 🙂

          Almost done the mortgage debt now but given my mortgage is just 1.7% I prefer investing for the next couple of years.

          Good to hear from you Neil.
          Mark

          Reply
    1. I think XIU is a pretty good fund for those that do not want to select individual stocks. Far worse funds/ETFs to own Henry 🙂
      Mark

      Reply
  6. Good stuff Mark, I’d just reverse #3 & #4. I’d suggest one pay down all credit card debt and put as much as one can towards their mortgage, after maxing their TFSA(s).

    Reply
    1. Oh, that’s fair. If folks have lots of debt, including personal debt, I hope that goes without saying. I would hope lots of folks don’t have credit card debt when alternative credit is available.

      Reply
  7. I inherited a million USD a few years ago. We just invested it the same way the rest of our investments were configured. It is important to take a small amount, in our case maybe 3%, to do something fun with, but the bulk should be invested for long term growth. I guess if you are so early in your financial journey that you still have debt that would be a good place to spend some of it, but we had paid for our home long ago and never borrowed for any other purchases. It’s nice to have some taxable investments in addition to tax free and tax deferred ones and a windfall is a way to add to the taxable portfolio when you’ve already maxed out the tax advantaged accounts.

    Reply
    1. Well put Steve, re: have fun. I mean, as you know, life is for the living and fun.

      We don’t have any room in our registered accounts for it would be taxable investing for us if we ever had a financial windfall. We barely have any mortgage debt.

      Reply
  8. With a lump sum, I would most likely invest in high yield dividend stocks and high growth stocks. Can’t go wrong with either of them provided there is no market crash on the horizon.
    Now the energy sector looks very attractive as it looks like the price of oil and gas won’t go down anytime soon.
    Mark, I always enjoy your articles and thanks a lot for your constant updates on all topics.

    Happy investing and good luck.

    Reply
  9. Hi Mark,

    i recently received a severance from work and was looking at investing in ‘flow-through’ shares available directly from Canada based mining companies, as i don’t have much contribution room in my TFSA or RRSP, and i don’t have a mortgage.
    i think i understand how ‘flow-through’ shares work from a tax perspective, but i’m not sure how to go about selecting a company to invest with. i’d appreciate any information you may be able to share.
    i really enjoy your blog. it’s so interesting and informative. thanks, Greg

    Reply
    1. Thanks Greg 🙂

      I’m more of a “plain vanilla” investor who doesn’t invest in those types of shares myself. Too complex for me and too risky for the benefits.

      Here is some government literature on that:
      https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/flow-through-shares-ftss.html

      The biggest challenges with these shares/investment options IMO are as follows:

      1. Often offered by new and/or smaller companies that aren’t making a profit yet. Why invest in that company unless totally speculative?
      2. Resource or mining companies are historically very cyclical. You need to be mindful what goes up could go down, a lot.
      3. Flow-through shares (I think?) have a holding period of up to 2 years. You can’t get your money out during this period, no matter how the company is doing or what you need the money for. That seems very illiquid to me 🙂

      If you don’t have much TFSA contribution room, nor RRSP room, nor mortage, I would think common shares in a taxable account or a low-cost indexed fund in a taxable account might offer more income and growth over time with less short-term flow-through shares risks.

      Be careful about the tax treatment as well!
      https://www.taxtips.ca/personaltax/investing/taxtreatment/flow-through-shares.htm

      Thanks for the kind words Greg 🙂
      Mark

      Reply
    2. I dabbled in flow-through shares more than a decade ago. For me, it was an introduction to the rule “Don’t invest in anything you don’t understand”. It generated nice tax write-downs, but I don’t think I actually made any money. They are complex and you need to be in exactly the right one at exactly the right time..

      Reply

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