WINDFALLS CALL FOR PRIORITIES

How best to spend one

Q. Rick: I just came into an inheritance of $50,000. Should I use it to pay off bills, buy a new car, invest or something else? I'm 30 years old and only have about $20,000 saved so far in my company retirement plan. — Jan from Hopkinton.

A. Jan: In situations of a relatively small inheritance or other unexpected windfall, such as a gift or employment bonus, you need to prioritize how you spend the money.

First and foremost, if you carry any high-interest loans — especially credit card debt — pay all of those off immediately.

Next — assuming you have money left over — if you don’t already have one, start an emergency fund. Your emergency fund should equal at least five to six months’ worth of regular monthly expenses, eight to 10 months if you’re selfemployed. Save this money in a safe and liquid account, such as a savings or checking account or money market mutual fund.

Third, if you still have money left, and are saving for an important short-term purchase such as the down payment on a home, save that money conservatively as well — best bet, short-term CDs. Or, you could use the leftover money here as a down payment on a new car — but only if you really need one and were going to have to buy one anyway.

Next, if you’re fortunate enough to still have money left, invest an additional amount in your company’s retirement plan this year. Your goal when saving for retirement is to invest 20 percent of your gross yearly income each year in your company retirement plan or other retirement vehicles — such as a Roth IRA.

Given that you only have $20,000 saved for retirement so far, I’m guessing that you’re not reaching that 20 percent goal, and certainly not maxing out the amount you can save in your company’s retirement plan each year. If my assumption is wrong, and you are maxing out your company retirement plan contributions — perhaps because this was the first year you could afford to contribute fully to it — then, if you qualify, definitely set up a Roth IRA retirement account. Fund that with mutual funds that compliment and further diversify the various funds you’ve invested in as part of your company retirement plan.

To set up a Roth IRA, contact a large brokerage house — such as Fidelity or Charles Schwab. They can easily walk you through the process and help you with the paperwork needed to set up such an account.

Best of luck.