Financial windfalls come in many shapes and sizes. Sometimes it’s a bigger than expected bonus check from work. Other times it’s receiving a major inheritance from a mysterious relative you barely knew.
If you’re lucky enough to have unexpected money fall into your lap, it’s a great opportunity to play catch up, get ahead, or otherwise boost your financial trajectory.
Sadly, many people mismanage financial windfalls. Not only do they blow through all the money they were blessed with, they end up in a worse financial position afterwards. 😬
Here are a few tips on how to manage a major financial windfall should you be so lucky…
Separate the money and emotions
A very wise man once said, “mo money, mo problems.” (RIP Biggie! 🙏)
While coming into unexpected money can be a blessing, it can also be stressful. Receiving a lump sum of cash comes with a lot of necessary decisions and new emotions.
For example, cash received as part of a life insurance payout or an inheritance might come with guilt or pain attached after experiencing a traumatic event. That’s totally understandable!
Remember that it is okay to have mixed feelings about financial windfalls. There is truly no rush to spend all of your new cash.
In fact, you’re likely better off waiting until you can process some of those emotions before you make any decisions on what to do with your money.
Don’t rush to spend that cash
Spending windfall money can be easier than spending regular money you worked to earn.
You’ve probably heard that roughly one third of lottery winners declare bankruptcy shortly after receiving their cash. The issue is that many of these folks do not have experience managing large amounts of cash. They don’t know how to make great money decisions, so they tend to act on impulse and chase dreams with their newfound wealth. They quit their job, travel lavishly and buy that multi million dollar mansion. Pretty soon, they’re bereft of that windfall.
Patience is a virtue. That’s especially true when it comes to financial windfalls.
Most folks think that the more money you have, the less care you need to take when spending it. If you have millions of dollars, you should be able to swipe your credit card wherever without even thinking, right?
Wrong. The truth is the more money you have, the more care you need to practice. Mindful spending is always crucial, especially with large sums.
So, if you receive a financial windfall, don’t be in a rush to spend. Wait until your emotions are no longer amped up. Fully process everything, think through your options, then come up with a plan on how to use this money to better your life.
Don’t forget about taxes
Oh yeah, don’t forget how tax brackets work! Depending on the sum of money you receive and how it is given to you, there could be a mammoth tax burden.
Uncle Sam will always be standing there with his palms up to claim his share. This is yet another reason why it’s so important to not spend all that money right away! You could be left with a much smaller portion of that money after paying federal and state taxes.
For example, when you win the lottery, the IRS takes 25% right off the bat, but you could end up owing even more when you file your taxes at the end of the year. Plus, the state you live in will want its cut of the funds too.
Lottery winners aren’t the only folks that need to worry about massive taxes. If you made out big on an investing win, or are selling a home for much more than you paid for it, you could be subject to capital gains taxes too.
It’s important to research the tax implications of your windfall before spending or making plans for that money.
Determine your goals and values
When a financial windfall strikes, it can be easy to misuse that money if you aren’t clear on what your specific goals are.
You may be flush with money now, but it’s not infinite. Chances are you have a few aspects of your life you’d like to improve.
Begin by revisiting some of your top financial goals. The ones you were working towards before the windfall took place. Can you pour your new money into those goals and fastrack progress?
As for your values in life, ask yourself what you’d like your life to look like within the next few years. What money moves can you make now to put yourself in that situation?
A little self reflection goes a long way. It’ll stop you from buying stupid sh*t you don’t need that doesn’t truly increase your long term joy in life.
More questions to chew on…
- What (and who) is most important to you in life?
- Are you already happy in your home?
- How is your retirement investing going?
- Could you switch careers or start that business you’ve always dreamed of?
If you’re starting your financial journey from the very beginning, check out our 7 Money Gears. They help build a solid financial foundation before tackling larger or more risky financial projects.
Make a plan
To make money last (and grow!), you need a plan for it.
And one of the best ways to plan for your money is to make a budget!
I know what you’re thinking… Budgets are “boring” and restrictive. But, the opposite is actually true.
Budgets give you the freedom to spend money on the things you care about the most, while ensuring that you don’t spend money you don’t have and dig yourself into a hole.
YOU get to make your budget. And YOU decide what goes into it! As long as you’re allocating around 20% for savings and investing, the rest can be divided up however you see fit.
If you’ve never budgeted before, consider starting with a 50/30/20 budget. It’s the most beginner friendly method of budgeting, because you only need to keep track of your cash in broader strokes. Just allocate 50% of your budget to your needs, 30% to your wants, and 20% to savings and investments.
After receiving a financial windfall, you might want to continue normal spending for most of your budget categories. Over time, you can increase your budget in little ways to make room for bigger wants and needs.
For example, if you decide you want to finally move into a bigger apartment, you could increase your housing budget by around 20%. Or, if you want to spend more money on your favorite hobby, you can increase the entertainment line in your budget.
Making lifestyle upgrades and treating yourself is totally okay! But you should do it intentionally, and incrementally. 😎
Spending without a plan means the money is controlling you, instead of you controlling that money.
Think about “secondary costs”
It’s not the sticker price of mansions and fancy cars that leads lottery winners to bankruptcy. It’s the ongoing maintenance and upkeep costs that eventually drowns them.
Buying a nicer house will, of course, mean increased taxes – forever. The fancier car will mean higher insurance rates and more expensive oil changes every year.
Anything you purchase (especially big ticket items), is rarely just a single transaction where dollars leave your bank account just once. More dollars will trickle out to pay for secondary costs, and they really can add up!
Be wary of buying stuff that perpetually increases the need for extra spending.
Create an Emergency Fund
Having a fully stocked e-fund is just like keeping a first aid kit on hand. When you have one, you’re prepared for all types of little disasters, and most big ones too!
Emergency funds are the first line of defense against unexpected expenses. They protect you from dipping into your retirement accounts, or needing to go into debt if/when financial disaster strikes.
So before putting that windfall money to use, make sure your emergency fund is fully padded. We typically recommend 3-6 months worth of living expenses in a high yield savings account.
Get rid of high interest debt
One of the best uses of financial windfalls can be to eliminate bad debt.
Why? Because the high interest rate on things like credit card debt, personal loans or payday loans erodes your wealth pile faster than you can make it up in other areas.
Using some (or all) of your windfall money to pay off high interest rate debt can essentially get you a guaranteed 15-30% return on that cash. Because money paid towards loan balances immediately saves you from paying interest going forward.
Plus, paying off debt can help you in many other facets of your life. You’ll enjoy less stress, more monthly cash flow, and be able to focus on other financial goals without that debt weighing you down.
Invest that cash!
Another worthy use of that financial windfall is to use it to accelerate your investing progress!
If your company has a 401k match, investing enough money to take full advantage of that perk is a no-brainer move. Actually, you might do this before tackling debt.
401k matching is like free money, so pounce on it!
Beyond that, maxing out tax advantaged accounts like your Traditional and Roth IRAs can help you crush your retirement savings goals. A Traditional IRA contribution could help you to lower your taxable income for the current year, while a Roth IRA will allow you to make tax free withdrawals in retirement!
Don’t forget – investing in yourself is also an option. You could increase your earning potential for years to come. Continuing education, spending money on specific courses to learn new skills, or even starting your own business can be great ways to put that windfall money to use!
Donate it
One of the best ways to get richer is to give your money away!
Okay, okay, so maybe donating your money may not increase the balance in your bank account. But it’ll make you far richer in other aspects of life.
Giving back to your community can make you feel more connected with the world around you. It helps you remember that having loads of money isn’t always the most important thing in life.
Just be sure to thoroughly vet any charity you’re considering donating to. You want your money to have the biggest impact.
Pro tip: Consider opening up a Donor Advised Fund! It combines investing, giving, and saving money on personal taxes.
Get help from people you trust
You very well might be able to manage your own finances. But there’s no harm in seeking help, either from a financial advisor, or trusted money mentor.
However, there are a few things you should keep in mind before making a decision on who to trust with your money.
When it comes to financial advisors, you should only work with flat-fee professionals. These advisors won’t receive commissions on any investments, so they’re more likely to offer you unbiased advice.
At a dead minimum, you should seek out a financial advisor who is fiduciary. This means they have a legal obligation to work in their clients’ best interest (as opposed to their own).
Remember that not all financial advisors are created equal, so be sure to do your due diligence. Read reviews and ask around before entering a relationship.
Family friends can also be a great place to turn for help and advice. But, choose wisely who you take advice from.
Personally, if I received a $1M windfall, I would only trust others who actually have several million dollars of their own. The fact that they have grown and managed large amounts of wealth is proof they know good money moves.
Even if you have a small amount of money, don’t ask advice from your broke friends on how to spend it. You’ll end up in the same position as them.
Choose wisely who you consult.
The Bottom Line:
If you’ve been blessed with a financial windfall, kudos to you. This is an exciting opportunity most others don’t get. This is a great chance to catch up on retirement investing, rid yourself of debt, or make intentional lifestyle upgrades.
Being patient and creating a well thought out plan for that money is important. It’ll make sure you don’t lose it all and end up in a worse spot. Separate your emotions from decision making, review your goals and values, and seek help if you need it.
I am confident you will make the right choices. 💪
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