What would you do if you suddenly received a financial windfall?
All of us have thought about the awesome things we would do.
- Maybe buy a mansion on the beach.
- Fill an extra large garage with custom classic cars.
- Or just get out of debt.
Most adults will receive a financial windfall at some point in their lives.
It could be winning a $10 million lottery! Or Receiving an inheritance from a rich great-aunt.
But windfalls also come in the form of:
- A large bonus at work
- An Inheritance
- Life Insurance
- A Lawsuit Settlement
- Insurance Settlement
- Sale of Real Estate
- A new job with a huge income increase
- The Sale of a business
With a financial windfall, the possibilities are endless!
At least that’s what a lot of people think.
Windfalls Can Cause More Debt Than Security If They’re Not Handled Correctly
NBC News reported that more than 70% of lottery winners exhaust their fortunes within 3 years.
Can you believe that? I can, I actually saw it happen.
My aunt and uncle won the lottery when we were young. Not millions of dollars, but at least a few thousand.
They were so excited! They bought a new house, a boat, a vacation home, and jet skis. All the things they ever wanted!
But within a few months, they were in more debt than they were BEFORE they won the lottery.
This happens to a lot of people who receive windfalls. We’ve all heard of famous athletes, movie stars, and singers who made millions of dollars but later filed for bankruptcy because they ran out of money.
They didn’t have a plan and they didn’t make a budget.
I do not want to see that happen to any of you.
If you ever receive a windfall, make sure to follow these steps to ensure your windfall sets you up for financial security, not financial ruin.
1. Pay Taxes on Your Windfall
One of the very first things you want to do when you receive a financial windfall is to find out how much you will owe in taxes and put that aside.
Lottery winnings can require paying taxes up to 40% of their worth, depending on your state, income, and winnings.
If you won $1,000,000, that means you could need to pay up to $400,000 for taxes. Your real winnings could only be about $600,000.
Check with a tax accountant to see how much you will end up owing on your winnings.
Money from different places creates different tax bills.
An inheritance of your father’s IRA will have different tax rules than a bonus you receive at work.
Before even considering the money yours, talk to an accountant to ensure you get your taxes paid correctly.
2. Use Your Windfall to Pay Off Debt and Build an Emergency Fund
If you’ve got high-interest debt like credit cards, the first thing you should spend your windfall on, besides taxes, is paying off your debts.
Low-interest debts like medical bills, student loans, or mortgages, are usually a lower priority. But it if would help you sleep better at night and increase your financial stability, it usually makes sense to just pay them off too before thinking of different ways to use your windfall.
Debt is a constant drain of negative interest on your net worth. Every month that bill sits there gaining interest, your overall net worth is going down.
Use your windfall to clear the slate, if possible. Then build up an emergency fund. By ensuring you have 3-12 months of living expenses saved up, you shouldn’t have to worry about building more debt in the future.
3. Pick One Way To Celebrate
So you’ve paid your taxes and paid off any debts you might have. You’ve got a clean slate on life and just want to celebrate your windfall!
Decide on one thing to celebrate. Take 10% or less of the windfall and go nuts.
Maybe you recently lost a parent and inherited some money. You and your siblings could go on a family trip to your parent’s favorite beach.
Or you just got a big bonus at work. Take your spouse out for a fancy dinner.
Choose one exciting way to celebrate your windfall and enjoy it with those your care about.
Then, STOP.
4. Deposit Your Windfall in a High Yield Savings Account and Don’t Touch It For A Few Months
After you have paid your taxes, paid off your debts, and had a little fun with your windfall, put the rest in a high-interest savings account, and DON’T TOUCH IT.
- Do not lend money to needy family members
- Don’t go out a buy a brand new house
- Do not quit your job
Receiving a windfall usually comes with high emotions:
- The death of a loved one
- A sudden win in Vegas
- Selling a Family Home
- Selling a Family Business
Making important financial decisions when you’re emotionally charged is not the best idea. People can easily take advantage of you or you could make decisions you might later regret.
Put your money in a savings account and let it sit for a few months while your emotions relax and you can work on the next steps.
(High Yield, if possible, so you can at least earn some interest on it. CIT Bank and Ally are both banks I use that offer higher yield savings accounts)
5. Get a Realistic Estimate of What Your Windfall Can Buy
Some people see all those zeros on a check and immediately think they’re rich.
A $1,000,000 lottery prize might seem like enough to quit your job and buy a new house on, but realistically, it’s probably not.
After taxes, that million dollars is probably more like $600,000.
Invested in a low-cost index fund earning an average of 7% annually, that $600,000 could safely give you an annual income of $24,000 if you were to follow the 4% rule.
Could you afford to quit your job and continue living your lifestyle on $24,000 a year? Some people can. Most people would not want to.
You’d probably want to keep working. But it might give you some breathing room to change careers if you wanted to. (Climb the Corporate Ladder or Make a Change)
Take some time to figure out how much money you actually have after your windfall. And what you can realistically buy with it.
A new job with a $10,000-a-year salary increase might be life-changing! But if you were to take that money and immediately increase your lifestyle with a higher mortgage, fancier cars, or other permanent life changes, you might be stuck in the same place at the end of every month that you are now.
6. Make a Wish List
After figuring out how much money you actually have from your windfall and what it could actually buy, begin to make a wish list.
- Maybe you’ve always wanted to go to Europe. How much would it cost?
- Do you want to pay for your kids’ college?
- Want to purchase a second home to be closer to your grandkids?
- Do you want to retire early?
Decide what you really want to do, then figure out what to do with the money to accomplish your top priorities.
I absolutely love the idea Andy Hill shared on his podcast Marriage, Kids, & Money.
His wife’s mother passed, leaving her a small inheritance. Grandma was always good about taking their kids school shopping at the end of summer and throwing wonderful family holiday dinners.
In honor of her mother, they put the money into an investment portfolio. Each year, they use the dividends to take the kids school shopping and throw big family dinners during the holidays.
This is a wonderfully thought-out plan for a financial windfall. Instead of throwing the money away by buying a few things here and there, they created a lasting memory that will allow them to create even more memories throughout the years.
7. Get Professional Help
If you have taken the time to really plan how you want to use your windfall but you’re just not sure how to do it, it might be time to get professional help.
- A Tax Accountant should be the first person you contact to ensure you handle your windfall correctly from a tax perspective.
- Contacting a lawyer could help you prevent unscrupulous people from taking advantage of you.
- Working with a financial planner can help you choose how to invest and designate monies to achieve the things you want to accomplish.
Just make sure the professionals you choose are legitimate, cost-effective, and have your best interest at heart.
Wrap-Up
Getting a large financial windfall can be life-changing! Just make sure that you take the correct steps to ensure it is a positive life change.
- Pay your taxes
- Get rid of debt
- Have ONE celebratory purchase
- Then put your money away while you decide your best play
Now off you go to Vegas! I wish you the best of luck!
What do you think? Have you ever received a windfall? How did you handle it? Things you’re glad you did or wish you hadn’t?
Leave a comment below and join the conversation.
Good advice. I hope to use it one day! LOL!! Will let you know….