Blend common sense and cool-headed calculations to put your windfall to its best use

Deciding how to spend an unexpected windfall is a classic dilemma of financial planning. Do you spend or invest? Do you eliminate credit card debt or pay off your mortgage? Spending money is tempting, but resist the urge. The money you received represents an opportunity to make great strides toward your long-term goals Follow these steps to use your inheritance to create a sunnier financial future. (And see Take the Right Steps to Manage an Inheritance for more guidance.)

Assess your debt. Some types of debt are more desirable than others. For example, a home mortgage typically has a lower interest rate than credit cards, the interest you pay may afford you a nice tax break, and the loan is helping you build equity in an investment that could earn you money in the future. Credit card debt, on the other hand, usually has a double-digit interest rate, the interest is not tax deductible, and the items you buy with it are expenses that are unlikely to appreciate in value. If your only debt is a home mortgage, investing may well be the better choice for you.

If you pay off debt today, what happens tomorrow? If you use the money to pay off your credit cards, do you have a plan in place to avoid racking up a high balance in the future? If you spend all your money to pay off a balance you’ll quickly recreate, you’ll miss a great opportunity to enjoy the long-term benefits of investing.

How alluring are your investment options? How attractive is the stock or real estate market at the moment? If your best investment vehicle is currently a low-yield CD or money market fund, you may be better off paying down the debt. But if you can put the money in a tax-advantaged account, such as a 401(k) or an IRA, your tax savings can nudge the needle back toward investing.

Look at the numbers. A quick calculation can help bring your decision into sharper focus. Will you save more money if you pay down your debt, or do you stand to earn more if you invest it? For example, if you’re paying 15 percent annual interest on a $10,000 credit card balance it would otherwise take you five years to pay off, you’ll save $4,098 in interest payments if you eradicate your balance now . Conversely, if you invest that $10,000 in a tax-advantaged account that earns an eight percent return over the next five years, you’ll earn $4,898. And if you hang on to that investment for the next 20 years, the earnings climb to $39,268. (See the How Long Will It Take to Pay Off My Credit Card? and How Much Will My Traditional IRA Be Worth at Retirement? calculators to run your own numbers.)

When in doubt, do a little of both. Of course, you don’t have to choose only one course of action. If you have high-interest debt and a need to shore up your long-term investments, you can opt to tackle both goals, albeit on a smaller scale than if you directed the total amount at one objective. To learn more about this divide and conquer approach, see Get Big Results from Small Amounts.

THE BOTTOM LINE: Receiving an inheritance or other windfall is a rare gift. Use this opportunity wisely by taking the time to weigh your options and choose the course of action that will best bolster your long-term financial health.