Becoming the beneficiary to an unexpected sum of money can be gratifying and daunting at the same time. Depending on the amount you receive, a windfall can help equip you to fulfill many short or long-term goals that would have otherwise been beyond your financial means. However, planning and managing the effective use of your money to achieve those objectives can be confusing especially to those who have little prior experience with money management.
Whether it’s an inheritance, a legal settlement, a generous gift or the result of winnings, we’ve compiled a handy breakdown so you can make sure you make the most of your windfall.
It might seem counter-intuitive but one of the wisest decisions you can make is taking the time to allow yourself to adjust to your new circumstances. Consensus opinion amongst financial experts is that most people coming into a sudden windfall will lose well over 50% of their money in a relatively short amount of time1.
Bearing this in mind, the first thing you want to do is assess your current income situation, are you employed? If you have a partner, are they employed? What are your costs of living currently, and how they be affected by a sudden loss of income? Based on these calculations come up with a figure that will allow you to subsist comfortably for at least a 6 month period without any other source of income, and set it aside in your checking account. Then take the rest of your money and put it into an accessible, low-risk savings vehicle, such as a money
market fund, or a Certificate of Deposit.
Depending on the source of your money you might be lucky enough to escape any tax consequences of your windfall, but before you spend anything you’ll need to determine how much, if any is due. We recommend consulting with a CPA qualified tax professional, especially in complicated situations involving retirement plans, inheritances or liquidating stock options. They can help you calculate the amount owed, and offer some avenues for protecting your money from the tax burden where possible. A tax advisor can help you choose whether to receive your money as a lump sum or in annuity payments if you have the option. They will tell you whether you need any further insurance, or estate planning assistance.
Now that you’ve taken care of immediate obligations it’s time to decide what to do with your money. If you have some degree of experience with investing you may already know the goals you want to put your new funds towards, however if you’re new to this, then establishing a financial plan is a good step at this point.
Confer with your immediate family and identify the goals you want to work towards, whether it’s funding your children’s college education, retiring early or purchasing a house. Determine what you need to do now, what has to be done soon, and what can be put off until later. Any high interest loans you’ve incurred such as credit card debts are usually best paid off as soon as possible in order to free you up from costly recurring obligations. Focus on pressing health concerns for you and your family and make sure these are taken care of; any costly home repairs are also best tended to sooner rather than later.
You may want to enlist the help of a financial advisor to help assess your current financial situation taking into account the new money. Based on this evaluation you can help form the basis of a strategy for investing your capital that can earn enough return to ensure your medium and long-term objectives.
A study conducted by the National Endowment for Financial Education (NEFE)2, found that upon receiving a windfall, many of the reactions included a sense of anxiety, fear and loss and an inability to see the money as an advantage. After you’re finished being sensible it’s important to remember that this is your money now. Even if it may have been unearned in the traditional sense you’re entitled to the benefits, so take some time to relax and treat you and your loved ones.
1. Larimore, Lindauer, and LeBoeuf (2006). The Bogleheads’ Guide to Investing. Chapter 15, p.180: Wiley.
2. NEFE (2001). Financial Psychology and Lifechanging Events