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What Should you do with a Windfall?

Received an inheritance? Won the lottery? Congrats! We all dream of coming into money, but if it happens, what exactly should you do with a windfall? Here’s how to manage an unexpected lump sum of money responsibly while still having a little fun.

If you come into major money — like winning the lottery — you should still save and set yourself up for retirement.We all dream of the day when we’re gifted with a winning lottery ticket or an inheritance; a dream that we spend an inordinate amount of time during our working lives thinking about. But if you got it, what should you do with a windfall?

We daydream about building our fantasy house, buying a Ferrari and sharing our new-found fortune with friends and family. Sudden wealth can be an exciting surprise for anyone, but it comes with its own unique pitfalls.

Believe it or not, lottery winners are twice as likely than the average person to declare bankruptcy

Why? Most people who go under after receiving a windfall have limited financial education and/or poor habits that existed prior to the event. It may be thrilling to come into money that you didn’t expect, but how many can say they know what to do once the money arrives?

You may think that that only applies to people that win a few hundred thousand or less, but there are countless cases of those that came into millions…and lost it all. I don’t tell you this to kill the dream, but rather to make you aware of the consequences of money when you aren’t prepared for it.

Whether you’ve inherited $50,000 or won $25 million, there are steps you can take to assure your financial health stays intact — or better yet, improves. The more money you’re looking at, the more critical it is to move slowly and seek the help of trusted professionals (not your well-meaning but ill-informed brother-in-law). Anybody looking at a windfall of $1 million or more should speak with a tax professional, an investment advisor and a trusts and estates attorney.

1. Deal with debt

If you suddenly have a lump sum of cash, pay off your debt!

I know it’s not exactly the most appealing thing to do, but a debt-free lifestyle gives you freedom, improves your credit score and allows you breathing room that you may not have had before. Not only that, but it will likely free up monthly income that would otherwise be dedicated to interest payments.

2. What does the new money mean for your taxes?

If you’ve found yourself in a situation where you have more money than you ever imagined spending, you have a few chores to do first. Before you call your friends or parents and tell the great news, you should consult with a tax professional.

Unless you already are one, you probably don’t know just how complicated the U.S. tax code can be when it comes to inheritances or winnings. Don’t be afraid to get professional financial advice either. Investment advisors are there for you to use and have advanced knowledge of things like estate planning and building realistic budget that you can live comfortably on.

3. Prepare to save

Establish a savings account if you don’t already have one.

Most financial advisors recommend keeping between three to six months’ worth of expenses set aside in case of emergencies, and a windfall should be a quick way to get this done. Unless you have won millions, you’re most likely going to be continuing on with the same job, so taking away the stress of living paycheck to paycheck could do wonders for your mental health.

4. Set yourself up for a great retirement

Once you’ve taken care of any outstanding debt and built up some savings, it’s time to take care of your retirement accounts. You may think that it’s irrelevant after coming into money, but knowing you have a back-up plan can make all the difference in the world.

If you’ve suddenly realized enough wealth to quit your job (congratulations!) it doesn’t excuse you from retirement planning. Putting away money into a Roth IRA every year adds up over time. Current laws allow up to $5,500 per year in funding. If you earn 8 percent and keep up the pace for 20 years, that adds up to just over a quarter of a million dollars.

5. Allow yourself a little fun

It’s not all work if you end up with a windfall. There’s nothing wrong with spoiling yourself a little with something you’ve always wanted. Diets fail when they don’t allow a little wiggle room and so do budgets. Being responsible becomes much easier when you tell yourself that it’s okay to buy that fishing boat or convertible you’ve been thinking about getting. It’s not all work and no play when you come into money.

The steps you’ve taken to ensure your financial safety will allow you to enjoy your windfall stress-free.

Have you ever come into money unexpectedly? What questions arose? How did you handle it?

Published or updated on December 11, 2013

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About Daniel Cross

Daniel Cross has been in the industry as an investment writer and financial advisor since 2005. He holds the Chartered Financial Consultant designation (ChFC) as well as Series 7 and Series 66 licenses, and has embarked on the arduous journey of obtaining the coveted CFA designation. Daniel lives in Florida with his wife, daughter, and pet Tortoise ironically named Turbo.


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  1. Chris says:

    When my grandma passed away, she wanted us three grandkids to have some money. We each got $13k in December to end one year and another $13k in January of the next.

    I didn’t know it was coming, and was completely shocked and humbled that she wanted to do that. She was a school teacher in a 1-room school house in rural Iowa and lived her life as a farmer’s wife…not ever a lot of money, but told my grandpa she wanted us to have something of the life insurance money.

    That money created a completely different life for my wife and I. We went from hoping that we could build a house in 5 years to having it happen in 1 year. $26k isn’t the lottery, but it fixed some wrongs and created new opportunities immediately. I never got to thank my grandma, so the only thing I can do now is try to do the same for my grandkids in her honor. I’m glad it came at a time in my life where I knew to use it for debt and savings….my younger sister bought a car that she’s had nothing but problems with.

  2. dojo says:

    My husband jokes that, if we won the lottery (which would be pretty amazing, provided we don’t play it), we’d cash the money, take our immediate family and LEAVE THE COUNTRY. This way we don’t have to deal with the flood of relatives who haven’t spoken to us in years, but will be suddenly hit by a new found love towards us and our money 😀

    Kidding aside, making sure you secure your future is the best way to do: paying off debt, creating a decent savings account, planning for retirement. You can still have fun and not squander all your money. It clearly means you need to be disciplined, which many people aren’t.

    We’re not having big windfalls, but the extra money we get is put towards our savings (we don’t have debt) and we still keep our regular expenses going.

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