If you receive a sudden windfall – perhaps from an inheritance or a work bonus – you might feel an overwhelming desire to treat yourself. This might involve booking a dream holiday or making a significant luxury purchase you’ve been saving up for.

While there’s nothing wrong with using a portion of your newfound wealth to create memories, it’s worth taking a step back first and thinking clearly about areas where the money could be put to more long-term use.

Before you rush to spend your bonus or windfall, keep reading to discover five smart alternatives.

1. Build an emergency fund or bolster an existing one

You never know when an unexpected event will derail your progress towards your long-term goals.

If, say, you have a sudden boiler breakdown or face a period of ill health, an emergency fund could provide an invaluable financial safety net.

A good rule of thumb is to set aside between three and six months’ worth of essential household expenses in an easy access savings account. If you’re self-employed or have many financial dependents, you may want to aim for as much as 12 months of costs.

In retirement, holding as much as one to two years of expenses might be advisable.

If you already have an emergency fund, be sure to check it’s still fit for purpose. Receiving a bonus or windfall could be a great opportunity to top up your safety net, providing additional peace of mind and reducing the risk of having to rely on high-interest debt to cover unexpected costs.

2. Clear any unsecured debt and consider overpaying your mortgage

Debt can weigh heavy on your mind and this can be incredibly draining for your financial and mental wellbeing.

The stress of unsecured credit card debt can even create a cycle of anxiety and worry, making it harder to break free.

As such, using your windfall to clear any high-interest debt might be a smart move. This could prevent interest from snowballing, saving you money in the long run, and easing the emotional burden debt can bring.

Once you’ve dealt with this unsecured debt, you may also want to consider overpaying your mortgage.

Many lenders allow you to repay up to 10% of your outstanding mortgage each year without facing early repayment charges. This could reduce the overall term of your mortgage or lower the rate of interest you pay. Just be sure to check with your lender first, as their conditions may vary.

3. Contribute it to your pension

While retirement might not be your first thought after receiving a bonus or windfall, investing in your future could be a wise decision.

Boosting your retirement fund could improve your long-term financial security, and pension contributions are tax-efficient too.

In the 2024/25 tax year, the Annual Allowance means you can tax-efficiently contribute up to £60,000, or 100% of your earnings, whichever is lower. This includes third-party contributions and any tax relief.

This means that a £100 increase to your pension fund would only “cost” you:

• £80 if you’re a basic-rate taxpayer
• £60 if you’re a higher-rate taxpayer
• £55 if you’re an additional-rate taxpayer.

Just note that if you pay higher- or additional-rate tax, you need to claim this extra relief through your self-assessment tax return.

4. Invest it for long-term growth

If you have any medium- or long-term goals in mind – typically five years away or more – investing your bonus or windfall could help your money work harder for you.

Rather than sitting in relatively low-interest savings accounts, investing could allow your wealth to grow over time through investment returns and the power of compounding.

This approach could also protect you from “lifestyle creep”. This is when you adjust to a higher standard of living after a windfall or bonus, only to find yourself struggling to maintain it when the extra money stops coming in.

Investing might remove the temptation to spend, keeping your money out of reach while it potentially continues to grow.

5. Speak to a professional

Ultimately, making the most of a sudden windfall or bonus is about having a strategy that aligns with your life goals rather than rushing in headfirst and spending it recklessly. This is why speaking to a financial planner could make a difference.

At Optimum Path, we can help you build a bespoke plan that involves managing risk, ensuring your portfolio is adequately diversified, and making the most of tax-efficient opportunities.

A windfall could be the perfect opportunity to make lasting, lifelong memories. Equally, it could bolster your long-term financial security. Our guidance can ensure that you make the right decision for you and with confidence.

Get in touch

So, whether you’ve received a windfall and require some guidance before you spend it, or simply want some advice about managing your wealth, be sure to contact us now to find out how our Chartered financial planners can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. The Financial Conduct Authority does not regulate tax planning.