What to do with a windfall
Seven steps to consider if you've got a lump sum
Perhaps your sum is from; an inheritance, a lottery win, the sale of a business or property, an insurance pay-out, or just a stroke of luck. Whatever the case, you’ll soon start thinking about what to do with the funds.
Any extra cash is always an opportunity to improve your financial situation, but many people waste such windfalls because they don't have a specific plan of what to do with it. One potential issue to avoid is pressure from family or friends to spend all your funds on fun – instead of using it wisely to get what you really want from life.
Here are the top seven things to consider when you get a windfall.
1. Pause first
This is the most important step!
Even though you know better, sometimes funds that may come to us easily are the easiest funds to let slip through our fingers. After a flood of wealth, it can be tempting to make illogical decisions. This means it’s tempting to spend it all on things you don’t need.
Fight the ‘urge to splurge’, and instead pause and think things through.
2. Spend a little
After all, money is for spending at some point.
Keep five or so percent to treat yourself to a new fun toy, experience, or holiday. This will probably be money well spent. Even when you’re spending this sum, still think carefully about it, spend wisely, and if possible, wait for a sale or prices to drop before you buy.
Just ensure you don’t get carried away, as how you use the remaining ninety five percent is crucial…
3. Think about what you really want from life
Goal-setting is key.
Achieving what you really want from life could include:
- Buy a house or repay the mortgage. Obviously, this depends on how much money you’ve received and what your goals are.
- Fix anything that’s broken. Use your windfall to repair whatever is broken in your life. Start with your own health (this is one of the key ways the wealthy spend their money). If you've been putting off a trip to the dentist or a minor medical procedure, take care of it. Do the same for your family. Next, fix anything else you’ve been putting off – perhaps your car or the roof.
- Invest it. Often, the best thing to do is take the remainder of a large windfall and invest it for growth. Bank accounts and investment property aren’t the only way to make your money work for you. There’s a huge range of investment options available to suit anyone. For many, this is the wisest idea as it will enable you to achieve what you really want in life – perhaps a financially secure retirement or other major life goal.
4. Repay bad debts
Doing so will generally provide the greatest possible return on your investment (for example, a 20 percent return if your credit cards charge you 20 percent). It'll also free up cash flow; if you pay off a card with a $50 minimum monthly payment, that's $50 extra you'll have available each month. Most of all, repaying debt will relieve the psychological weight you've been carrying for so long. Don't underestimate the feeling of freedom that comes from no longer having creditors.
5. Talk to a pro
We’ve all heard the stories of lotto winners and sporting stars who go from boom to bust in just a few short years – a financial adviser can help you avoid this situation. This is especially true if you’ve never handled as much money as you now have.
A professional can also help you be realistic. For instance, if you’ve come across $10,000 (or even $100,000) many people can have unrealistic expectations about how far such a sum can go.
6. Ensure you understand any tax implications
Together with talking to a professional financial adviser, a tax adviser or accountant may be well worth it too. This is because you might owe taxes on your windfall – this will be dependent on the source. If you forget this and spend the money, you could end up in a tough position when you later find out you owe the IRD.
If needed, you might need to set aside enough to pay your taxes before you do anything else.
7. Update your estate plan
If you already have an estate plan, it makes sense to revisit it periodically anyway, but it nearly certainly needs updating to reflect any changes required after receiving a windfall.
It's important to have an estate plan in place to ensure that your money and assets are managed according to your wishes upon your death or incapacitation. When you pass away, a detailed estate plan can make the wealth distribution process much less upsetting for your grieving beneficiaries as well.
The bottom line
Let’s recap the top seven things to do after you receive a windfall:
- Pause first
- Spend a little
- Think about what you really want from life
- Repay bad debts
- Talk to a professional
- Ensure you understand any tax implications
- Update your estate plan