What to do with a windfall
Question: I recently lost my job and was given a severance package that included a payout of a third of my annual salary. Luckily, I was unemployed only two weeks and my severance is not tied to my acquiring a new job. So, my question is what I should do with my windfall? Should I put it into savings? My savings balance is currently equivalent to six months salary. Would it be better to pay down my mortgage (my interest rate is 5.75% and the balance is $140,000)? Or is there another recommendation you would make? Thank you! Rachel, Lebanon, OH
Answer: I'm glad you got another job so quickly. I would lean toward keeping the money in savings until you're more confident and comfortable in your new job. With all the uncertainty about the economy I would want to make sure that the job was working out for you and your employer before I touched it. Keeping the money in safe savings for now is a hedge against another setback.
What about longer term? I always like the idea of building up a portfolio of longer term savings in taxable accounts, a mix of stocks and bonds. (This is in addition to your emergency savings, the cash portion of the portfolio.) Yes, you pay taxes on realized capital gains, dividends and interest. But unlike a retirement savings plan you can tap the money at any time without penalty. I like the diversification that goes with this strategy: A home, retirement savings accounts, emergency savings, and taxable accounts invested in longer-term investments. It's an alternative recommendation.
You can compare that investment approach to paying off a large part of your mortgage debt. Many people prefer the security that comes from working off the mortgage quicker. It's an attractive option for many folks, so long as they're in a home they want to stay in and won't have to pick up stakes to find another job if they're laid off.
The reason I emphasize stability of place and security of work is we get many distress stories from people who moved to another part of the country for a paycheck yet are financially struggling because they can't sell their home.