Would You Blow a Windfall?

by Miranda Marquit · 19 comments

windfall
I’m sure you had a dream of suddenly receiving a huge windfall at one point or another. Receiving an inheritance, writing a best-selling book, or winning the lottery are all ideas that capture our imaginations. The problem, though, is that many of use aren’t ready to have that type of cash drop on us. The result, especially in a fit of initial exuberance, can be to run through the windfall too quickly and end up back at square one.

Before You Spend Money, Take a Step Back

While it’s tempting to rush out and buy a new car — or even a new house — it’s better if you take a step back and re-evaluate your situation. The same is true when it comes to deciding where to invest your windfall. Even smart moves, like investing, can turn into nightmares if you aren’t properly prepared.

Instead of making decisions quickly, put your money in a low-risk, interest-bearing account (or several if you are worried about FDIC protection). Let the money sit there for a few weeks while you think about the situation and consider your financial priorities. What do you want your money to accomplish? What are you looking for right now? Consider the following:

  • Financial security
  • Future growth
  • Having fun
  • Helping others
  • Estate planning

Look at these items and figure out what is most important to you. If financial security is at the top of your priority list, then you can use your windfall to pay off debt, and establish some sort of income portfolio that an benefit you over time. You can also set up foundations and give to charity, as well as put together the essentials of your estate plan. In many cases, you can use your windfall to do a little of everything. First, though, decide what is most important, and tackle that first.

Recognize the Realities of Taxes

So many people get excited about the advertised dollar amount like that $1 million dollar lottery check, and immediately plan for how to use that amount. However, you will likely need to pay taxes on your windfall and thus you aren’t going to net $1 million. With any windfall, you likely can’t count on the entire amount of money that you receive to be part of your plans. A tax professional can help you get an estimate of how much you will owe in taxes so that you can begin planning for that. Subtract out taxes from your equation and make plans based on your after-tax money. Strategies like donations and retirement account contributions can reduce your tax liability, but you do need to be ready for that aspect. It’s better to over-estimate what you owe in taxes, though, because it’s better to be pleasantly surprised than to owe more than you expected.

Get Help with Your Planning

Once you know what you want your money to accomplish, and how much you are likely to have after taxes, it’s time to start making decisions with your money. Get help with your planning. It’s okay to pay financial planners, lawyers, and other knowledgeable and trustworthy professionals to help you get squared away. Figure out what investments will be of most benefit to you, and get help with estate planning, and with vehicles that can help you protect your wealth. Get the help you need, and you will be more likely to succeed in the long run, rather than squandering your windfall.

So, how will you spend your windfall? And what would you do with $1 million dollars?.

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{ read the comments below or add one }

  • If I had to win a large amount of money I would quit my job as soon as I got the money in my hand. Then I would build/ buy at least two income properties. I’d also invest some of the funds, pursue my PhD and start a family.

  • If I came into a large amount of money ($1mil) I would move my family to Australia, purchase a house, invest in some further education, and invest the rest in stocks & bonds.

  • If I had a large windfall of money I would not buy “stuff”, like cars, boats, planes, etc. I would invest my new found soldiers (Mr. Wonderful) in assets that would make me more money. Real Estate, businesses, precious metals, stock market and also charity.

  • There would be a lot to consider, but I’m dumping my debt. Hands down, it would be the smartest thing for me to do. I would immediately see a return on it by not having to pay those high interest rates. Then I would figure out what to do with the rest of it.

  • RAnn says:

    I doubt I’ll ever come into a million but my husband inherited (unexpectedly) about $60,000 shortly after we bought our second (current) house and when we had two preschool kids. We put part of it toward the mortgage, remodeled the kitchen and invested the rest in mutual funds. I recently inherited a pretty much expected $150,000ish. At this point we have a child in Catholic school and one in college (pretty much on scholarship) and are about ten years from retirement. Our house is paid for. We used $20,000 to remodel the bathrooms. We put a good chunk in my 401k by maxing out my payroll deductions and living on the inheritance. We also added some to our Roth IRAs and started accounts with Lending Club and Prosper. It gave a real shot to our retirment savings.

  • jimmy says:

    I did get a windfall. I worked for a very successful company and over a six year run (amidst a total of 15 at the company), made about $7 million after tax from stock options. I splurged a bit, took the family on an African safari and other nice vacations during the golden years. I drive a nice car, and have a weakness for gadgets. I also paid off the mortgage, socked away college funds, and invested the rest for retirement, in that order. I gave about $100k each to family and charity. I live off of my salary alone; money goes into my investment account (although i don’t save all that much these days, to be honest), but the money never comes out. I’m 49, hope to quit the corporate rat race in the next few years and still work, but not so hard and at something more fun.

  • Gladys says:

    Thank you for your sane tips and thought-provoking guidance– it is hard to argue with common sense. I also appreciate that you would give a percentage of your windfall to help others like family and your favorite charity. Bless you for all your help to those of us looking to live frugally and wisely and thank you for caring about the people you share this earth with.

  • joy2b says:

    A thousand? Buy a nice steak, take a month off from thinking about money, don’t change anything.

    A million? Go from using a 401k to a broker. Possibly go on vacations. While it’s not enough for a young person to happily retire on, it’s partway there.

    Five+ million? Keep the job for at least a few months, while getting a broker and an accountant, and then transition to a volunteer position as a part time job. Once the general plan is sorted out, price out trimming bills or getting rid of them. At that point, I can think longer term, and afford a 5 year return on insulation and windows, a 15 year return on solar…

  • I would take the same approach I take with any large amount of money that comes my way. First, I do nothing. After a few days/weeks, I take 5-10% and spend it on whatever I feel like buying. The rest gets invested for my future.

  • FrugalRican says:

    I have a mini windfall in the form of my tax return. I’ve allowed myself to score a little higher in return, because this is essentially the money that I am using to go back to school. In other words, I’m using it to further my education, but I gave myself a good $30 to spend on something for me. It’s always important to give yourself SOMEWHAT of a comfort! But I try to “reinvest” any windfall, whether it’s for education or for financial investment, I want to use my money wisely!

  • If I came into a million dollars – I’d spend 10k on a vacation of a lifetime, and another 10k for some splurges at home (i.e. a hot tub!). The rest would be invested and would allow us to retire that much earlier.

  • Carl Lassegue says:

    I liked your last point: “Get Help With Your Planning”. Especially with large amounts of money, it’s important to talk to a professional who can help you identify the best investment opportunities.

  • KM says:

    I think we would buy a lot of property and rent out the condos and such so there is steady income, as well as maybe invest some of it. This is if it’s a large sum like a lottery or something.

  • Michael James says:

    If I came into a seriously large amount of money, I’d invest it in a combination of stock and bond indexes and then I’d blow the dividends and interest each month living a great life. But I wouldn’t dig into the principal.

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