Spend that windfall wisely (even if you didn't win the Powerball lottery)

Huge windfalls, like Wednesday's $580 million Powerball lottery drawing, get all the attention, but every day Americans get smaller surges of money – an annual bonus, for example, or a tax refund. You might be tempted to use it to pay off your credit card balances. Not so fast. There might be better ways to use it to improve your overall financial position. Here are five questions to ask yourself before you decide what to do with that windfall:

1. Do I have an emergency fund?

J Pat Carter/AP
A sign showing the new Powerball jackpot amount stands beside US 1 highway in Homestead, Fla., Wednesday, Nov. 28, 2012. Even if they don't win the Powerball jackpot, many Americans get sudden windfalls. Here are five questions to ask before you decide what to do with your windfall.

Since the odds of winning the Powerball lottery are ridiculously small, preparing for the unexpected should be high on everyone’s list of financial priorities. For example, if you’ve been living paycheck to paycheck, you can use any windfall you receive, to set up an emergency fund for the unforeseen, such as a divorce or job loss. That fund should be large enough to cover all living expenses for at least three months; six or more is recommended. Without the reserve you would probably be paying those unexpected bills via credit cards, putting yourself deeper in the hole. When the emergency occurs, the current low zero percent teaser rates might no longer be available. So you might want to “invest” some of the windfall into this hedge against uncertainty.

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