A financial windfall is when you receive a large, often unexpected, amount of money. It could be thousands or even millions of dollars, but either way, making a smart strategy is essential to getting the most out of your financial windfall.
Winning the lottery or finding a million dollars may sound like a fantasy, but financial windfalls of various amounts happen all the time. Whether it’s an inheritance or a smart investment that pans out, it’s exciting to receive a large sum of money all at once. But it can also be overwhelming. There are often competing emotions over whether to concentrate on immediate or long-term desires, combined with lots of questions. Unfortunately, too many people who receive windfalls mismanage them and wind up right back where they started.
One in three people who receive a large financial windfall have negative savings only two years later.¹
Don’t fall into that trap. Managing a windfall smartly can create generational wealth for you and your family. The good news is that you don’t have to act immediately. Take your time and consider carefully what you want to accomplish now and in the future. Then, set a plan.
When most people think of a financial windfall, they think of winning the lottery. Big winners are announced frequently, and this can be a truly life-changing experience. Those who take time and prepare will have better outcomes than those who splurge. Often, you have a choice on how you want to receive the money. A smaller immediate lump sum or a larger amount, spread over many years. If you can, talk to a financial professional before you make this decision. But understand that you’ll have plenty of options to grow that money in either circumstance.
Some financial windfalls come in less fortunate times. Losing a loved one is never easy, and figuring out what to do with inherited money or a life insurance benefit can add additional stress to a difficult time. Again, take your time. Deal with the immediate emotional needs of your family and save the windfall planning for a later date.
Another form of financial windfall is an investment that hits big. Perhaps you got in early on a company that had a huge growth spurt. Maybe you found that long-missing bitcoin information. That’s great! Before you reap the rewards, though, you should fully understand how taking profits out of the market will affect your finances and taxes.
Extra preparation may be required when you sell an important asset. You’re trading something of value for cash, and that can actually lower your overall wealth if you don’t prepare carefully.
If you’ve received a settlement for an injury or other lawsuit, whether as a lump sum or annuity payment, you definitely want to make it last. Preparing is important. Without it, you could end up in a worse situation than you were in when you started.
It’s important to understand all the things that can go wrong when someone receives a large sum of money, so you can avoid them. Here are a few of the most common mistakes people make when they get a financial windfall:
Whether your windfall is $1,000 or $100,000, spending without creating a budget is a recipe for disaster. Even though your financial windfall may seem like a lot now, if you spend it too quickly it won’t feel that way down the road. Think carefully about how long you want your windfall to last, create a budget, and stick to it.
For example: You get an unexpected inheritance of $500,000. You want to use some of it to pay off your mortgage and would like the rest to last 10 years. If your outstanding mortgage is $150,000, you should spend just $35,000 of your windfall yearly to ensure that it lasts. Of course, that calculation assumes low growth, and there are financial options that can help make those funds stretch further.
In some cases, you’ll owe some of your financial windfall to the government in the form of taxes, unless it’s an inheritance or life insurance benefit (which are generally tax free). There are ways you can significantly reduce some of your current and future tax burdens, but it will take careful planning with a certified tax professional. Be sure to consult one to fully understand how much of your windfall is actually yours to spend.
Helping family and friends in need is a good thing, but excessive spending on others is one of the most common ways that people lose their windfalls. Be a caring and generous person, but also be careful who you tell about your windfall and how you help friends and family members who may come asking for money.
The classic example is a new car. The old saying is that it loses 20% of its value as soon as you drive it off the lot. Regardless of the exact numbers, it holds true that cars are usually bad investments. There are all sorts of goods that lose value quickly despite initially looking like great buys and spending too much of your financial windfall on such things can quickly reduce it.
Preparing and budgeting are important aspects of any family’s finances. It’s especially important when you are dealing with a financial windfall. To avoid common mistakes, there are a number of steps you should take.
First, pause. Take a deep breath. While it’s exciting, there’s no need to rush. In fact, it’s often better to let the initial excitement wear off before you start making plans. Put the money in a safe, short-term savings account or CD while you figure out how to make the most of it.
One thing you can do almost immediately after receiving a financial windfall is to pay off any outstanding high-interest debt, like what you owe on credit cards. You may also want to consider paying off a mortgage, a car loan, student loans, or other forms of debt. Many of those have lower interest rates, though, so it may make sense to continue to make normal payments and invest your windfall.
Life is expensive, and your windfall could help you more in the future than it can help you right now. Being prepared for what is to come can ensure that you are able to enjoy financial protection for life. Start a list of all your potential future needs to better understand how a windfall fits into your lifetime budget, and work back from there. Your list should include things like:
You won’t have all the answers right away, and that’s OK. A trusted financial professional deals with situations like financial windfalls on a regular basis, and yours can help you understand important benefits and risks you may not even know to think about. Our agents are here to help you prepare for your financial present and your future.
Your windfall may seem like a lot of money now, but managed and invested wisely, it can grow considerably over time and be worth even more in the long run than you thought possible. A balanced and diversified portfolio can set you up for a healthy retirement and provide generational wealth for your family.
Not only can donating to a charity give you good karma, but it can also help with taxes. Where you decide to give is up to you, and a tax professional will be able to help you define the best course of action to reduce your tax burden.
After all, it’s your money. After you do some smart strategizing and take care of a few necessities, be sure to set aside some of your good luck to treat yourself and your loved ones.
If you’ve received a financial windfall and would like to make sure it provides comfort for years to come, our team can help you formulate a smart, forward-thinking strategy that will ensure your family’s present and their future.
1 Elizabeth O’Brien. “One in Three Americans Who Get an Inheritance Blow It.” MarketWatch, 2015.