In times like these, we'd all welcome a chunk of change, but there are lots of ways to use the money. Here's a guide. May 1, 2009 By Shelly K. Schwartz, Special to CNBC.com You just inherited half a million dollars. Your start-up company sold for a tidy profit. You took the lump sum retirement plan payout. No matter how you come across it, or how great the sum, a windfall is a welcome addition to anyone's wallet--all the more so these days given the market malaise. Not only does found money help alleviate the stress of making ends meet, it also provides an once-in-a-lifetime opportunity to achieve most or all of your long-term financial goals. At the same time, however, sudden wealth also opens the door to a host of financial challenges. MORE FROM CNBC Surprising Stock Market Indicators America's Biggest Categories of Personal Debt How To Open A Swiss Bank Account Basic strategy Should you use your newfound wealth to prepay debt, lock it up in CDs and money market funds to preserve your assets, or roll the dice on real estate and stocks to grow your net worth - arguably the most intriguing option today considering most asset classes are selling well below their recent highs? Advertisement The answer, says Lee Baker, a certified financial planner with Apex Financial Services in Tucker, Ga., depends on your age, assets and financial priorities. "The first thing you have to do is step back and survey your landscape," he says. "Is the windfall enough to change your lifestyle? Does it replace income, or do you have a lot of debt and now have to go back and take care of those things that have been neglected?" Credit card balances and car loans are "bad debt," he notes, since they not only come with sky-high interest payments, but are also tied to either a depreciating asset or purchases you've already consumed. So, if you're sitting on extra cash, knock out debt first. Your mortgage loan may very well be another matter. Advertisement While most consider home loans to be "good debt", since it's tied to an appreciating asset and you benefit from the mortgage interest tax deduction, Baker says it may still make sense to pay down that debt. "If your windfall is large enough that you can afford to quit working, the mortgage deduction doesn't benefit you anyway [since you no longer collect income to apply the deduction towards]," he says. If you plan to continue working, however, or expect to make significant annual withdrawals from your IRA or other retirement accounts, keep the mortgage for its write-off value and invest the money instead. Such an approach can also buy you piece of mind. Advertisement "Maybe you come into $100,000 and you decide to put that money into a college fund for your kids," says Baker. "You've always worried about whether you'll be able to pay for their education and now you've alleviated that burden. That may be worth it to you." Safety net One key piece of the puzzle is to mitigate risk by having the "right kinds and right amounts of insurance", including health, auto, property, liability and long-term care, says Karin Moloney Stifler, a certified financial planner with True Wealth in Hudson, Ohio. "You have to have those safety nets in place to protect your assets," she says. "If you can take off the table the chance that you'll have to shell out hundreds of thousands of dollars for long-term care, for example, that allows you to have more freedom in how you invest the rest." MORE FROM CNBC Surprising Stock Market Indicators America's Biggest Categories of Personal Debt How To Open A Swiss Bank Account You might also consider separating your windfall from your personal assets by setting up a trust, or a Limited Liability Company (LLC), to protect yourself and your home from the threat of legal claims. Advertisement Your estate plan, of course, should also include a will, a trust fund for your heirs and the designation of a legal guardian to manage your assets in the event of your premature death. Investment With your assets well protected, says Stifler, it's easier to determine how much of your windfall you can safely risk through other investments. First, she says, determine what kind of return you need to meet your goals. If your goal is to retire at 55 years old, for example, decide how much you'll need on a yearly basis to maintain your standard of living and multiply that by the number of years you expect to live. These days, most planners tell clients to base their projection on age 95. If you also plan to purchase a retirement home in Cape Cod, toss that cost into the mix. And don't forget to set aside cash reserves worth three to five years of living expenses in a liquid, interest-bearing account like CDs or Treasury bonds. This should be different from your average emergency fund, says Stifler. Any savings left over can be allocated toward other investments without significant risk to your overall financial plan. Depending on the size of your windfall, of course, the best strategy may involve no risk at all. "If you immediately think about allocating those [windfall] dollars to more risky investments I'd ask you to consider, 'Why?'" says Baker. "Are you trying to make money just for the sake of making money? If you've got enough to cover yourself for your expected lifetime, why take any additional risk and put assets at risk when it could have a negative outcome?" Real estate or stocks That said, there are some who would never be content with a portfolio centered on asset preservation. If you're one of them or actually need to invest for future growth, the current bear market offers ample opportunity. The National Association of Realtors' housing affordability index shows the relationship between home prices, mortgage rates and income is among the most favorable since tracking began in 1970. In many parts of the country, such as Las Vegas, Phoenix, southern California, and south Florida, housing prices have fallen 30 percent to 40 percent over the last 12 months alone, due to record inventory and the large number of distressed properties being sold at a discount. With prices well below their pre-recession highs, investors looking to purchase additional properties can start shopping around to identify their market or neighborhood of choice. MORE FROM CNBC Surprising Stock Market Indicators America's Biggest Categories of Personal Debt How To Open A Swiss Bank Account Just hold off for another few quarters before you actually buy, says Sam Stovall, chief investment strategist for Standard & Poor's. "Our belief is that real estate prices will continue to fall until this time next year so we don't think real estate is the best place to be right now," he says. "We think the turnover [of homes for sale] is starting to improve, but as more people put their homes up for sale that'll put more pressure on prices." Undervalued stocks, he suggests, offer more attractive investment opportunities over the short-term. Indeed, even if the S&P 500 is now more than 30-percent above its March 9 low of 676. "Our belief is that that will be the low for this bear market [but] we are likely to experience a retest of that low as investors digest some of these gains [through profit taking as the index edges higher]," says Stovall, who wrote "The Seven Rules of Wall Street." "If that prior low holds, which we think it will, the market will give investors a second chance to get back in [at the bottom.]" Sectors to consider? Cyclical ones such as autos and airlines, financial services such as banks and brokerage firms, and consumer discretionary stocks such as apparel, household goods and hotels, all of which are poised to post the biggest gains in the months ahead. Stovall's latest report, "An Exception to a Rule," explains why. Since World War II, he notes, had an investor purchased an equal weighting of the 10 S&P 500 sub-industries with the worst trailing 12-month price performances at the bottom of the most recent bear market and held them for a year, their portfolios would have recorded an average price advance of 57 percent versus the S&P 500's average gain of 36 percent. What's more, he notes, these bottom ten sub-industries as a group posted annual increases that beat the market 90 percent of the time. Take it slow If you're among the few to be sitting on extra cash these days, consider yourself lucky - but mostly, says Stifler, consider your financial plan with care. Don't make rash decisions, put only disposable assets at risk and remember the goal with any windfall is to establish a foundation of financial security first. Get breaking business news and real-time stock quotes on CNBC.com.