The idea of getting a sudden cash windfall can seem great, but if you let yourself get too excited with no real financial plan, that money can disappear as quickly as it came.
The key with a financial windfall is that you put it to good use, and if possible, you invest it so that it grows over time.
What Counts As a Windfall?
The term windfall is used to describe a large sum of cash you may receive, which could be entirely unexpected. Examples of a windfall include the proceeds of an insurance or lawsuit settlement, an inheritance, a winning lottery ticket, or perhaps a bonus from your employer.
Even if it’s not a massive windfall, if you’re financially savvy in how you put the money to work, it could mean lifelong benefits, such as the ability to retire earlier.
The following are things you should do with a windfall, as well as things not to do.
The First Steps to Take
If you receive a windfall, there are a few things you should do first.
Set the money aside temporarily. If possible, you should put the cash into a safe account with no risk that might earn a little interest. Make sure it’s not an account with a linked debit card because you want to reduce your risk of someone stealing your information and making fraudulent purchases. It can be tougher to recover stolen cash than it is to dispute fraudulent credit card charges.
Once the money is in a safe place for the time being, figure out what your tax liabilities will be. Some money is taxable. For example, certain insurance settlements aren’t taxed federally. You may need to speak with a professional about this because depending on how you got the money you may have to pay state and federal taxes or something like estate taxes. If you don’t set enough money aside for this from the start, it can actually cause long-term financial troubles.
Think about whether or not you should pay off debt. If you have very high-interest, expensive debt, you might consider paying it in full. It’s not always a smart financial decision to pay all debt in full though. For example, the interest on your mortgage can get you a tax break, so it’s better just to keep paying that.
Set aside an emergency fund if you don’t already have one of at least six months of living expenses.
Give yourself time to breathe before you make any big decisions. A cash windfall can often be an emotional experience. It may mean you were in an accident or you lost a loved one, for example. Don’t make any big financial decisions when you’re in the thick of those emotions.
Once you do all these things, you can start to think about what your next steps will be.
Talk to a Professional
If you’ve never really dealt with a large sum of money before or even if you have, it’s important to speak with a financial planner.
A financial planner is someone who can help you understand the options, think long-term, and create a strategic way to manage your money.
If you do consult with a professional, it doesn’t mean that you have to pay that person to oversee all of your finances forever. You can simply go for guidance on very specific issues.
Once you’ve taken care of the essentials, including paying off expensive debt, then you’ll start implementing investment strategies.
When you’re coming up with an investment plan, whether it’s because you came into a cash windfall or not, you have to evaluate how much risk you can take on.
You want to earn returns that are going to help you meet your longer-term financial goals, but if you’re older, you don’t have a timeline that’s going to allow you to take on too much risk.
If you’re younger, you could allocate a portion of your cash to riskier investments, but don’t try to pick individual stocks, especially if you’re not experienced.
Again, this is where talking to a professional could be tremendously beneficial.
If you do set aside a substantial emergency fund from the start, you might be a little more tolerant of risk.
Most investors have a portfolio that combines stocks and bonds, but regardless of the exact mix and intermittent rebalancing, you should primarily stick with what you start with. Don’t plan to move your money around frequently.
Be Aware of Fees and Expenses
When you’re investing your money, it’s easy for your returns to be eroded by fees and expenses.
You need to be very aware of the fees and expenses you’re paying, and how they’re going to affect your returns.
There are index funds that are often the best option if you want to minimize fees. A broad index fund may charge around 0.25%, for example.
When you get a financial windfall, yes, it is important to think long-term and put that money to work for you so that you don’t one day look at your bank account and see it’s all gone.
With that being said, you can still plan to spend a little on something fun and enjoyable for yourself.
Don’t spend anything too quickly, because again, you need to give yourself a cool-down period so you don’t make an emotional decision.
Once everything has settled down surrounding the circumstances of getting the money, think about something you’d like to enjoy.
Maybe it’s a dream car or a dream vacation, for example.
There’s nothing wrong with playing around with a bit of your money, although what you can do depends on how much you get and whether or not you’re also able to achieve other financial goals first.
Most of us would love to get a cash windfall, but when it actually happens it can be overwhelming. Have a plan and strategy for the money so you don’t make regrettable decisions.