How To Be Smart About a Financial Windfall

Benjamin Long September 2, 2020Debt, IRA, Retirement, Taxes

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“Windfalls can result from fortunate events, like lottery winning, and unfortunate events, like a legal settlement. Whatever the triggering event, a big injection of cash can certainly be a life-changing event in someone’s life.”

Few would complain about a financial windfall, but many people report feeling feelings of anxiety, guilt and stress about what to do with new-found wealth, and even more importantly, how to not blow it. Making a plan, says the article “Handling a financial windfall” from MSN Money.com, is the best way to start.

Treat yourself. Finding a balance between being cautious about money and enjoying it is not easy, especially if you’ve never handled large sums of money before. One way to do this is to set aside a certain percentage of the money for fun. Depending on your situation, that might be 5% or less.

What is the tax liability?

Some windfalls come with taxes, and some don’t. Life insurance proceeds are not taxable, but an inherited IRA is. Gambling winnings are definitely taxable, as is income realized from the sale of a home or stocks. If you don’t know what the taxes on your windfall will be, find out before you spend anything.

Time for a team approach.

If you don’t already have an estate planning attorney, a CPA or financial advisor, now is the time. Ask well-off friends, whose business acumen you respect, who they recommend. Speak with these professionals to learn about what they do, and don’t be shy about asking what they charge for their services.

Create financial and life goals.

You may have choices now that you’ve never had. Knowing what matters to you, can help determine how you use the money. It’s very personal. Some of your choices:

Buying or upgrading a home
Investing in financial markets
Buying life insurance
Creating an emergency fund
Paying for education
Saving for retirement
Paying off credit card debt

These are just a few—the choices are limitless. Think about this from a long and short-term perspective. What matters today—buying a luxury car, for example—may become an expensive loss in ten years.

This is also the time to have an estate plan created, or if you have an estate plan, this is the time to update your plan. A big change in your financial situation may require changes to protect your assets, which can be done through your estate plan.

Enjoy the windfall but also be smart about protecting it.

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