The money from a financial windfall often feels much different than the money we receive from our paychecks. Receiving a large sum of money can feel unexpected (and monumental)—leaving us prone to emotional-decision making.
Perhaps you received an unexpected prize or bonus or maybe a loved one passed and left you with an inheritance. Regardless of how you received or plan to receive your windfall, there are many considerations for managing your new money.
If you don’t have a plan for how to handle your windfall, you run the risk of squandering it, forgetting about important implications (such as taxes), and moving too quickly, leaving you unsatisfied with your choices.
But handled and managed well, a financial windfall can be a tremendous blessing, opening up opportunities and allowing you to accomplish your wildest financial goals.
How Not to Handle a Sudden Financial Windfall
Before we get into smart ways to manage a sudden windfall, I want to highlight some things that you’ll want to avoid after receiving your money, such as:
- Letting your emotions lead your decisions.
- Spending extravagantly and impulsively.
- Making quick, arbitrary decisions.
- Listening to unsolicited advice.
- Upgrading your lifestyle.
- Failing to protect your estate/assets.
Avoiding these common pitfalls will help protect you from making decisions you might end up regretting.
5 Wise Ways to Handle a Financial Windfall
Regardless of how you came into your windfall, this is an exciting time with numerous possibilities! It’s important to take a deep breath and plan for how you’re going to manage this new wealth. As you plan, consider these five smart ways to handle a financial windfall:
1. Take your time.
2. Pay off debt.
3. Grow your savings.
4. Invest.
5. Ask for help.
1. Take your time.
Receiving a windfall is not something to be taken lightly and once the money is spent, it’s gone. That’s why it’s so important to take your time and really think about how you want to spend, save, or invest your newfound wealth.
You likely came into the windfall through an intense emotional event such as the loss of a loved one or an incredibly fortunate circumstance. Regardless, emotions are high and you’re probably facing a lot of pressure (and unsolicited advice).
Before making any big decisions, it’s wise to park your money in a high-yield savings account or certificate of deposit, while you think and plan.
2. Pay off debt.
Debt (especially high-interest debt) can keep you in a vicious circle of payments and interest.
Debt-free living can help you:
- Utilize more of your paycheck. You can use more of your paycheck for your financial goals such as saving or investing when you don’t have to make debt payments. For some, this comes to a significant amount of money per month!
- Be more financially secure. Having fewer liabilities makes your financial life more secure. If an emergency occurs, you will have less financial obligations to worry about.
- Retire sooner. When you clear out your debts, you’ll have more monthly cash flow to put toward your retirement savings, allowing you the opportunity to potentially retire early or sooner than you originally planned.
- Have less stress. Owing money can take a psychological toll on your mental health, causing stress and anxiety. When you pay off your liabilities, your budget (and mind) are more free.
- Own your assets. When you purchase goods such as clothing on a credit card (and don’t pay off the balance in full), a car with an auto loan, or a house with a mortgage, you technically don’t own those assets outright. The credit card company, dealership, and mortgage lender own them until your debt is paid off.
Consider using a chunk of your windfall to pay off any high-interest debt so you can experience freedom and work toward your financial goals—such as saving!
3. Grow your savings.
You most likely already have savings goals that you’re working toward—a second home, your child’s education, a dream vacation, etc. A large sum of money dropped into your current sinking funds (separate “buckets” of money earmarked for certain occasions) can help you reach these goals faster.
An unexpected windfall might also bring new opportunities that you hadn’t (seriously) considered before. Depending on the sum of the windfall and current progress on other goals, maybe it’s time to dust off dreams and consider their place next to your windfall.
Maybe you’ve always wanted to start a business, help a family member out of poverty, retire early, decrease your work hours, volunteer at a cause you care about, establish a foundation, or get a higher degree. Whatever your dreams are, it’s important to consider the cost and long-term effects of achieving them.
4. Invest.
Similar to filling up your sinking funds to save for various goals, consider using part of your windfall for investing in different investment buckets!
You can start by boosting your retirement investing by maxing out:
- Your 401(k). For 2023, the max yearly contribution is $22,500.
- A Roth IRA. You can contribute up to $6,500 (or $7,500 if you’re age 50 or older).
- A Health Savings Account. If you have an HSA, it can be used for current healthcare expenses or saved and invested for future years (or both!). Regardless of how you utilize it, it’s a triple-taxed advantaged account that you should consider maxing out. In 2023, you can contribute up to $3,850 for individual coverage and $7,750 for family coverage.
You can also consider short to medium-term investments through a brokerage account that carries no yearly contribution limits. And if you have access to discounted company stock, you can also consider buying more shares as a means of investing.
Perhaps there’s an investment that you’ve always wanted to try—such as commercial real estate, business ventures, or commodities—but didn’t quite have enough money or were cautious to jump into. Consider using your windfall to carefully invest in other types of investments as well.
5. Ask for help.
Managing sudden wealth is overwhelming and difficult to navigate. That’s why it’s helpful to have an objective third party assisting you in making rational decisions, staying disciplined, and (ideally) avoiding impulsivity.
A financial advisor can help you sort through your current financial situation, needs, goals, etc, and see how your new wealth can propel you forward.
Receiving a sudden windfall might seem as simple as being handed a bag of cash or a quick bank transfer—but in reality, it’s a lot more complex and it can carry a lot of responsibility. There are often taxes that need to be considered (and paid)—an advisor can help you minimize your tax burden while ensuring that you’re following all the current legal requirements. They can also help you preserve your wealth by assessing your risk tolerance and preferences, future needs, and cash flow needs.
A windfall will also affect your estate, making estate planning a priority. A financial advisor can help you protect your assets for you and your family and ensure your legacy goals are accomplished. They can also help you update your wills and trusts.
Manage Sudden Wealth with Legacy Planning
At Legacy Planning, we help provide our clients with the tools they need to successfully manage their finances—whether their money is from a steady source of income or an unexpected windfall. Having a solid financial foundation will allow you to successfully handle whatever comes your way.
Together, we can help you assess your goals, mitigate risk, plan for taxes, manage your debt, preserve your wealth, and maintain a disciplined lifestyle, all while educating and empowering you. To see if we can help you get started on your financial plan, click here to schedule a conversation today!
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
