Putting together this article was really inspired by a friend of mine winning the lottery. There are scenarios that happen every day to a lot of people. They receive an inheritance, a big bonus at work, a raise or they win the lottery. There’s a lot of stress and anxiety that can accompany the joy of receiving a big chunk of money.

There’s a number of things that you need to do when you find out about the money. The first and most important thing that you should do is relax, take a deep breath and think about it for a bit. A year ago when I inherited some money from my father I went thru this. The amount that I got is a fraction of what my friend won in the lottery, but figuring out what to do is on everyone’s mind.

The first thing that you need to do is determine whether the amount that you are receiving is material. A material amount of money is really going to be different for everyone. Receiving a million dollars to Bill Gates or Warren Buffett doesn’t mean as much as it does to Joe the Plumber (for those of you that remember him). What you will end up doing with the money will be very different if the amount is a significant amount of money or just a ‘good’ amount of money. In all honesty, what I am going to recommend doing with the money really isn’t that different if it’s significant or not. The only real difference is the amount of risk that you take in step 3 below, not really in steps 1 and 2.

Step 1 is to look at your debt. There’s what we will call good debt and bad debt. Bad debt would be anything today that has an interest rate above 7%. At some point in the future what would be considered too high an interest rate might change but as of October 2016, let’s call it 7%. The first thing you should do is pay off as much of this bad debt as you can. In the short term it won’t be as satisfying as buying a new car, but from a personal financial perspective, this is the best thing that you can do. Having a mortgage and a car loan (depending on how much it is and how much you make) is perfectly fine and normal to have. With the low interest rates of today (sub 5% for car loans and sub 4% for home loans) playing with the banks money is a great use of your own money.

Step 2 has to do with your emergency fund. I agree with all of the financial advise that you need between 3 and 6 months worth of expenses readily available to cover any unforseen problems. My general opinion is more along the lines of 6 months rather than 3 months, so setting aside what you are comfortable with is your next step in easing your mind. If you’re unsure of what this amount might be and you want some rules of thumb, i would say that you should have 12 times your housing payments set aside. Again, every financial situation is different, but the cost of housing to most people is their largest expense that can take 1/2 of what an individual or family makes. The 12-times rationale takes this into consideration. Again, look at your situation and think about what you are comfortable with.

As much as I’m a finance guy, I also understand that there’s some basic human instincts that have to be considered here. Taking the above 2 steps might not make you feel good about receiving this windfall of money, so if you want to go buy yourself a present, by all means, go ahead. My only point right here is that you might feel good about things initially, but in the medium or long term, you might think otherwise.

Step 3 gets you to the ‘how do i invest‘ question. Here is where you have to stop and think about just how significant an amount of money this is to you. For arguments’ sake, I will say that if you receive in excess of $100,000 we will say that the amount is significant, anything less will be considered a ‘good’ amount. The reason that I will talk about these differently is because the more significant the amount of money, the less risk you should take with it. You should take less risk largely because you might not need to take as much risk to achieve your long term financial goals. When i was talking to Mr. Lottery, I had pointed out that if he had a portfolio of $1.5 million, he should expect to generate $30,000 a year alone in dividends — if they were to invest everything in an ETF that tracks the S&P; 500. This reflects the historic average of 2% per year return in dividends. [note – over the last 10 years, the actual return has been a little under 2.2%.] On top of this 2% per year is potentially another 5.2% in S&P; 500 returns excluding dividends for a total return of 7.2% per year (if you reinvest the dividends). This comes to $108,000 a year on that $1.5 million portfolio.

Let’s keep something in mind — your emergency fund that you set aside in step 2 above does NOT get invested. This stays in something like a money market fund, a CD or simply in a bank savings account.

With your decision for what to do when you invest, as a general rule of thumb, i typically recommend to people that they invest in ETFs (exchange traded funds) or Mutual Fund Index Funds with extremely low expense ratios. This allows you to keep as much money for yourself rather than giving it away to people that aren’t going to beat the market. For simplicity, I’ve found 3 ETFs that I find represent three different chunks of the US stock market – VB, VO and VOO. VB is the Vanguard Small-Cap ETF, VO is their Mid-Cap ETF and VOO is their Large-Cap ETF. If you know nothing about stocks or investing, I suggest you use these 3 funds and adjust your risk between them. If you truly know nothing — put 1/3 into each of them. If you’re young or can tolerate risk, put a little more into the small-cap fund and a little less in the large-cap fund. If you are inclined to invest in some bonds, which most financial advisors recommend, the iShares ETF AGG is an investment grade aggregate bond fund that can cover you on non-municipal bonds.

As I’ve mentioned, most financial advisors recommend certain asset allocations depending on your risk profile. This basically means that they recommend investing some in stocks (equities) and some in bonds. This helps you spread risk out. Many rules of thumb include 60-40 (60% equities and 40% stocks) is one of the most popular. If you’re younger and less averse to risk then maybe a 70-30 split is for you. This all depends on you and the only person that can really answer how things should be allocated is you. If you truly have no idea, then go with one of the two rules of thumb, 60% stock and 40% bond after age 45 and 70% stocks and 30% bonds if you’re younger is a good way to think about it.

So here’s what you do with your windfall (in a nutshell) — take 60% of the money and put 1/3 each into VB, VO and VOO, then take the remaining 40% and put it into AGG. I’ll get into some more complex asset allocation strategies in another piece soon, but for those that are getting started and dont have time to “think things through”, this is a fast and easy way to answer this question.