Imagine, if you will, that you have just had a $50,000 windfall. It's completely unexpected. Perhaps your recently deceased maiden aunt remembered you in her will. Perhaps you've shared in a lottery win. Or your childhood collection of Dinky cars (all in their original boxes), which you recently cleaned out of the attic and sent to auction, turned out to be a great investment.

What should you do now? Your immediate impulse is to blow it on a holiday and a new car but then common sense sets in. Shouldn't you use it to set yourself up for the future? Carve a big lump off the mortgage, dump it into superannuation, renovate the house, get yourself a share portfolio, spend it on the kids' education...

You realise that, faced with a significant lump of cash, you're a financial ingenue. How would you know what to do? Once again your luck is in. We have turned to a handful of experts to help you decide what to do with your windfall, given the current state of the economy: inflation on the rise, volatile stockmarkets, relatively high interest rates.

We've taken the liberty of assuming you fall into one of three categories:

a 25-year-old, just starting out on a career, with no commitments, virtually no superannuation but with a HECS bill;

a 40-year-old couple, both working, with two children and a sizeable mortgage;

an empty-nester home-owner couple, approaching 60 and retirement.

Goodbye to debt

This is a good time to knock out some debt, especially non-tax-deductible debt.

"If you've got a car loan where you're paying 13 or 15 per cent, then use this windfall to get the hell out of those loans," says Alex Dunnin, the director of research for Rainmaker Information Services.

Interest rates on credit cards can be even more crippling at about 17 to 21 per cent. If you never pay much more than the minimum payment on your credit cards, do so now and avoid making that mistake again.

"We've come to the end of the biggest speculative bubble in history, financed by the highest ratio of debt to income in human history," says Steve Keen, an associate professor of finance and economics at the University of Western Sydney.

Carolyn Bond, the co-chief executive of Melbourne's Consumer Action Law Centre, sees many people caught in debt traps - and many of them have ended up there because "we can kid ourselves that bad behaviour is actually good". A windfall might not be a saviour if you focus solely on an investment strategy but are delusional about your debt and spending habits.

For example, Bond says, many high-spenders might use a $50,000 windfall to pay off a chunk of mortgage. That's fine - but not if you are in the habit of running up big credit-card bills and are later tempted to draw down on your mortgage to pay them off.

"You can say that's really quite a good financial decision - 'I'm now paying 9 per cent, not 19 per cent' - but what you've really done is put your food and groceries on to your mortgage," she says.

It's vital that, now you are in a position to dig yourself out of a lot of debt, you "understand your personal drivers" and avoid repeating mistakes.

Her general advice? "Pay off debt, particularly non-mortgage debt ... and keep it off." Be disciplined with any savings you make: "If all of a sudden you're reducing your payments by, say $200 a month, then make sure that money goes into long-term saving or to your super, or to something like that."

To splurge or not?

Most financial hardheads urge you to plant and grow every cent but Alex Dunnin recognises human frailty and the fact that it has been "a pretty bleak winter".

"If you want to spend a couple of grand on a bit of a toy, why not?" he says. "Upgrade your television or something but don't get overly stupid." Then, he says, "do something intelligent" with the rest of the money.

Steve Keen thinks a 25-year-old could afford to "have some fun": "I'd pack the bags and spend some time in Europe or Asia."

Financial planner Kevin Bailey, the managing director of The Money Managers, says $50,000 can make a lot of difference if it is well-invested. He warns against just leaving it in the bank to pay bills, petrol and clothes: "It would probably take less than four or five years to blow the lot and you wouldn't even know where you've blown it or how you've blown it."

Work out a plan

The experts agree a windfall is a great time for you to reassess your finances and develop a logical plan. Our older couple, in particular, would benefit from revisiting a financial planner, to see how the $50,000 should best be added to what we hope is an already-established transition-to-retirement plan.

Hugh Elvy, the manager of financial planning and superannuation with the Institute of Chartered Accountants, says your windfall should be "a trigger for you to sit down and review what you're actually doing ... It's critical to do the really basic stuff to start with. So, if you haven't, do a budget. Work out what you want to do with yourself, financial-goal-wise. Prioritise it, put a dollar value on it and [work out the] time frame."

For instance, a 25-year-old might want to work overseas for a couple of years, which would mean their windfall should be in something accessible and flexible, such as a high-interest cash management facility.

Whatever your needs, keep your head. "You've got to show vast amounts of discipline and try to remove all the emotion," Elvy says.

Fair shares

Most of our experts feel that the best way to enter the stockmarket is through super or a diversified managed fund. However, Stephen Mayne, a shareholder activist and the founder of Crikey.com.au, sees lots of opportunity for investing directly in shares after the recent market slide. "Any time the All Ordinaries gets below 5000 ... there is some very good buying," he says. He sees good buys in industrial stocks but also "a fair amount of risk that the commodity boom will burst".

Mayne would use a $50,000 windfall to buy a portfolio of 10 to 16 "quality stocks that have been beaten up badly".

Avoid anything too speculative. "Stick with ASX 300 stocks ... which have fallen by up to 50 per cent and don't have too much debt ... You want to make sure the company is worth a billion dollars-plus and then, if it has been savagely sold off, it's probably a good buy, because the market is down 26 per cent from the peak."

Property

The bulk of the property market might look shaky but that can be a good thing. "This is a real opportunity, [one] that hasn't been around for 10 or 15 years, to find some value in the housing market," says Peter Cerexhe, a finance and property expert, and the author of Smarter Property Investment (Allen & Unwin). A $50,000 windfall can be built into a sizeable deposit - and first-home buyers can also take advantage of the $7000 grant (see page 9).

Kevin Bailey says you could also take advantage of the first home savers' scheme, announced in the latest Federal Budget: "They haven't come out with all the details of it but if you transfer, say, $5000 a year into one of these first home savers schemes, then the Government is going to give you another $750 immediately, on day one, on top of it. Plus it's going to be paying only 15 cents in the dollar instead of your marginal tax rates."

The 25-year old

Our experts know that a 25-year-old might not be interested in buying a house just yet but say that should be their aim in, say, five years. If they have already saved $30,000 or $40,000, they might already have enough for a deposit. Government incentives for first-home buyers will give them another boost.

Cerexhe suggests taking advantage of high interest rates and simply growing the bulk of your windfall in an online savings account offering interest of 8 per cent or more. In a few years, it will have built up enough to give you a sizeable deposit on a home.

Dean Easterby, an adviser and financial planner with Centric Wealth, suggests putting $10,000 in a high-interest cash account to help fund travel and the other sorts of things a young person might want to do. "With the other $40,000, probably just put it into a diversified investment portfolio - with a minimum five-year time-frame, of course. That could be used for a house deposit or other things down the track."

Elvy suggests it's not too early to turn your mind (and a modest amount of cash) to super. "Depending on what their salary is, there would be a lot of value in putting $1000 into super and getting the $1500 [government] co-contribution ... That would be a useful investment."

This age group tends to have what Dunnin calls "lots of silly consumer debt" - which, he says, should be paid off immediately.

Keen suggests paying off any HECS debt and travelling or working overseas. "If you were over-cautious, then you might want to get a job straight away and have the balance in government bonds or a short-term account as an insurance in case of unemployment," he says.

Cerexhe has another suggestion: invest in your education to "future-proof your income", especially if you are "drifting" and earning a very modest income. Use your windfall to help you get qualifications in high-demand areas such as engineering, IT, accountancy or book-keeping.

"There is going to be an ongoing enormous demand for people with qualifications," Cerexhe says. "If you can do your four-year engineering degree, you'll lift your income from $40,000 to $100,000 for the rest of your life."

The 40-year olds

"Pay all but $500 off the mortgage and then treat yourself to a damn good night out without the kids," is what Keen suggests.

"Shut the gate. Pay off the mortgage," Easterby says. "That's just an absolute no-brainer because of 9 per cent interest rates at the moment."

That comment is echoed by pretty much everyone. "Up your mortgage payments as well," Bailey says. "Really go full-tilt."

"The reality is, with most mortgages today, you've got access to a redraw facility, so you've got access to the money if need be," Elvy says.

Super might be tax efficient but this age group will have to wait at least 15 years before they can get access to it. Paying off your mortgage, Easterby says, "can free up cash flow down the track for things such as super."

Cerexhe takes a different tack. He says this could be a good time for people to trade up - from a home worth, say, $600,000 to one worth $1 million. "Your home is your greatest tax haven," he says.

"If you can afford it, and everything is in place, then I'd be saying, 'Look to move forward and buy yourself a better home, a more valuable home, because they are coming down in price and there is a great taxation benefit' ... When you retire you'll be glad that you've got a very valuable home instead of what was your starter home."

The older empty-nesters

The magic word for anyone approaching 60 is super.

"I recommend just putting it straight into super as a non-concessional contribution, so there's no tax on the way in," Easterby says.

The tax advantages of super are impossible to ignore and a windfall is a great way to "top up" your existing pot. He explains why: "[Once you're more than] 60 years of age, any income drawn out of super is tax-free and any earnings in the super fund are also tax-free ... that means, if they are working, they can put all their taxable earnings into super and pull it out tax-free on the other side. It just turns it into a zero-tax environment."

Anyone in this age group should consult a financial planner to discuss a transition-to-retirement plan and how they can best use the windfall.

Elvy says that many people in this age group don't have enough super and, even if they do, "a windfall like this could help them retire a bit earlier".

Bailey suggests that a couple who are still working might consider investing some of the $50,000 in a term deposit and the rest at-call.

"Let's say they were on $60,000 salary. They could actually salary-sacrifice $20,000 into super and cut their tax down to 15 cents in the dollar instead of 30 cents in the dollar. So on $20,000, that's going to save them $3000."

They could then use some of the windfall to replace their income. But they should seek advice that is specific to their circumstances.