Theoretically, a sudden windfall should reduce your financial worries. Who doesn’t appreciate getting suddenly richer?
However, making good decisions with a large infusion of cash can feel overwhelming, especially if your windfall comes about because of something negative. For instance, Windfall when I received a life insurance payout after my father passed away in 2013, the money was both emotionally charged and stress-inducing, and I was terrified of making a misstep.
If you’ve received a windfall, taking your time and making intentional decisions about the money will serve you better in the long run. Here’s how you can do that.
Evaluate Your Financial Situation:
No matter how you received your newfound wealth, you’re likely to have a number of strong emotions associated with the event. And we all know that emotions and rational decisions can struggle to coexist. That’s why it’s a good idea to take a little time before you make any decisions whatsoever with your new money.
If the money came to you because of a negative situation, such as a death in the family, the end of a lawsuit, or the sale of a beloved business, your emotions will inevitably color your view of the money. I personally found that I wanted Dad’s insurance money to no longer be in my hands, because having it was a reminder of my loss.
Pay Off High-Interest Debt:
Even if you have positive associations with the money, those fuzzy feelings may prompt you to make risky decisions to keep the good vibes coming. Letting some time pass between receiving your windfall and deciding what to do with it can help you view the money more dispassionately so you can make the best possible decisions with it.
So how long should you pause before deciding what to do? Depending on the size of the windfall, you might want to wait as long as six months before making any decisions. This will give you time to process your emotions so that you’re psychologically ready to make these big choices.
Build or Boost Your Emergency Fund:
What you do with your money while you wait to make the big decisions depends partially on where your windfall came from. Life insurance benefits and other inheritance money can sometimes stay safely in the same account you’ll be paid from. In these cases, it’s common that your money will even earn some interest while it stays put. Simply keeping the money in place can be a good way to give yourself the emotional breathing room you need without worrying about making a preliminary decision.
Invest in Retirement Accounts:
Other types of windfalls, such as lottery winnings or an inherited retirement account, may give you the option of taking a lump sum or annual payouts. Choosing annual payouts will give you the opportunity to make lots of smaller decisions over several years, rather than overwhelming yourself with the need to make several big decisions at once.
For when you have no choice but to take your entire windfall into your hot little hands, stashing it in a money market account or high-yield savings account can be a good way to keep it safe.
Consider Real Estate Investments:
The tax implications of your windfall could be a major deciding factor in how you choose to use it. Some types of windfalls, like life insurance benefits, can pass to you tax-free. However, for most types of windfalls, you can assume that Uncle Sam will want his cut.
For instance, the killing you made at the blackjack table is considered normal income to the IRS, which means you may have shifted into a higher tax bracket when you walked off with a cool $40,000. If you don’t plan for this shift in your income taxes, you may find yourself staring down a nasty surprise come tax time. Your CPA can help you figure out the best way to navigate your sudden bump in income. For instance, they might suggest that you maximize your tax-deferred retirement contribution this year to help offset your windfall.
Set Aside Money for Education:
If you sold a business, inherited taxable property or accounts, or even got a major bonus at work, a tax professional can help you determine the most tax-efficient way to access and enjoy your new wealth so that you’re not stuck holding the bag when the taxman comes calling.Before you start making it rain, it’s important to look at your current financial situation and see how your new money can make it better.
If you’re carrying high-interest or revolving debt, using your windfall to pay it off, may not seem like a sexy use of the money. But reducing or eliminating your debt burden will give you more peace of mind and more financial freedom in the future. That money will turn into what feels like little windfalls every month when you don’t have to send most of your paycheck towards your debt.
Invest in the Stock Market:
Similarly, if you haven’t prioritized saving for retirement, your windfall can give you a great opportunity to improve your financial future. Maximize your 401(k), and use it as a springboard to send more money to your retirement every year thereafter.
Finally, keep some of your windfall as an emergency cushion. Knowing that you’ll be covered the next time a financial emergency strikes is a great gift to your future self.
Explore Charitable Giving:
It does feel good to receive a large amount of money, and having a little fun with it is a great way to enjoy it.
No matter how a windfall comes into your life, splurging on something that you couldn’t or wouldn’t otherwise have can be a great way to enjoy your good fortune. Deciding to use a set amount of money however you please is a life-affirming way to mark the occasion of your windfall.