What to Do With a Windfall

by Emily Guy Birken · 1 comment

luxury living
It’s a problem everyone would like to have: you inherit a nice chunk of change from your favorite great-aunt, you receive a signing bonus for joining a new company, or you do really well on your NCAA brackets one March, and you find yourself staring down a big decision. What do you do with this newfound wealth?

A windfall can mean different things to different people. For some, an unanticipated $500 can seem like manna from heaven, while to others it would take a check with five zeros on it to mean much of anything.

But the bottom line is that a windfall is money you hadn’t expected or counted on — and you now need to decide where it will best be used.

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 will 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.

Now let’s get to the good part. Where do you actually spend the money on? Here are some smart ways of spending, saving, and investing that money so that your windfall does not go to waste:

what to do with a windfall1. Treat Yourself

The lovely thing about a windfall is that it can give you an unexpected opportunity – whether that’s for traveling to far-flung locales or even just a guilt-free trip to your favorite store. So when you’re planning what to do with this sudden cash, start with a set amount that you can use however you want. Doing this will not only feel good, but it will also make it easier to be responsible with the rest of the windfall.

David’s Note: Emily is giving good advice here, but make sure you don’t blindly follow it. Money isn’t for hoarding, yes, but there’s no shame in saving all of a windfall if you truly treasure freedom above all else. Blowing some of the money is just a suggestion that can help some people find more motivation to save the rest, but it’s not for everyone.

2. Pay Down High-Interest Debt

This is absolutely the most important step for dealing with extra money. Paying off a credit card with 15% interest is like getting a 15% annual return on investment. Not only will you no longer have the debt hanging over your head — freeing up more of your money per month — but you will also have the ability to earn money on your money because it is no longer needed for this high-interest loan.

That being said, if the only debt you have is a mortgage or student loans, you will probably want to use your windfall for retirement, investing, or saving before paying off those loans. Your interest rates for “good” debt are the cheapest you’ll pay for any loan, so your newfound money can do you more good elsewhere.

3. Build an Emergency Fund

Everyone knows that they should have three to six months’ worth of living expenses set aside in case of bad luck. However, knowing you need an emergency fund and actually creating one are two very different animals. It can take a long time to build up those cash reserves, and if an emergency does hit, the crisis can wipe out your fund quickly. So once you have your bad debt paid off, consider putting your windfall aside so that you have a nice cushion, just in case.

4. Save for Retirement

According to the Employee Benefit Research Institute, 43% of American workers had less than $10,000 put away for retirement. Like the emergency fund, saving for retirement is something most people know they should be working on, but yet very easy to push off for tomorrow. With your windfall, it’s possible to make up for some lost time.

Not sure where to invest? Talk it over with a financial adviser. There are annual limits to the amount you can put in retirement-specific accounts like Roth IRAs, so this is an area where it pays to have an expert ally. Making good choices now will help you continue to enjoy your windfall later.

5. Put Money Aside for Junior’s College

With what you have left in your windfall, put some money aside in a 529 plan for your kids’ college expenses. While you don’t want to take this step before you’ve planned for your own retirement — your kids can take loans for school, while there is no way to take a loan for retirement — it will feel great to know that you are helping your children to secure their futures.

If you’re smart with allocating a windfall, even a modest sum can really help you get and keep your finances on track.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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  • Arminius Aurelius says:

    Boy Scout Motto : Be Prepared
    Life can be a boring drag or ….. it can be a challenge and an adventure .
    I personally lived a Dream Life but at a somewhat high cost .
    Was a lazy kid in High School , joined the Navy 1950 to 1953 . As a Seaman My pay was a bit over $ 100.00 a month . Every month I bought a $ 25.00 Savings Bond [ cost $ 18.75 ] for 4 years . Went to the Culinary Institute of America to learn the proper way to cook [ not the Navy way ] Worked for the finest Hotels and Private Clubs in New York City and Palm Beach . Did this for 6 years . I then set my goals higher and decided to try college for a year . If I liked it , would then finish my 4 years . Went to the University of Miami . Was hired by a food chain and within a few months became their Director of Training for the next 3 years. Then decided to go into the restaurant business for myself in 1970. Bought bankrupt businesses , 4 out of the 5 were bankrupt . Built them up over the years and made a killing . Worked 12 hours a day , 6 days a week . I always saved money . I then also [ after doing research for a year ] bought multi family rental properties , 10 buildings , 19 apartments . Had 15 year mortgages so as to pay less interest. Aside from the down payment on each building , my tenants paid off my mortgage . After 34 years in business , I retired and now collect rent from 2 out of the 5 businesses . Non of this would be possible if I had not saved any money . In short , money makes money even when you are sleeping . If you do not save any money , the last 20 + years of your life , you will live like ” Poor White Trash ” Your choice .

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