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What To Do With a Sudden Windfall

Published September 22, 2021

8 minute read

David Ning

By David Ning

Getting an unexpected windfall can cause plenty of emotions. On one hand, there’s the hoopla of getting a sudden cash infusion. It’s simple human nature to go wild when a large sum of extra money shows up unexpectedly. After all, it’s not earmarked for any of your normal expenses. It’s just extra money. Can you imagine instantly being debt free? Or never having to worry about your retirement ever again? That’s not even including the luxuries you might be able to splurge on — real estate, fashion, vehicles, jewelry, or technology. Yes, a sudden windfall of cash can be a huge boost. However, here are some things you should think about before you start spending.

Windfalls Aren’t Always Happy

For starters, not every windfall is related to a positive event. While plenty of us dream about winning the lottery, that’s not likely to happen for most (or all) of us. In reality, most windfalls come from some form of an inheritance. Obviously, that means a family member — and probably a close one — has passed away. The grief can be devastating, and no amount of money will bring that person back.

When my grandfather passed away, I saw firsthand how emotionally distraught my mom was. She felt so much stress trying to properly distribute his assets, according to his will. Handling any decent amount of money during times of heightened emotions is never advisable. My mom was trying to keep herself together and handle his estate in a timely manner, all while being incredibly sad about her personal loss. It wasn’t even a life-changing amount of money (although it was still a decent amount). The magnitude of the estate doesn’t really have any anything to do with how overwhelming and stressful the whole ordeal can be.

Emotions Are Always High

Calming the emotions isn’t much easier with lottery winnings either. It’s one thing to win a $1,000 on a scratch off ticket. That’s a nice bonus, but you’re still going to report to work Monday morning. It’s an entirely different ball game if we’re talking about multi-million dollar winnings.

You might have heard of lottery winners like Andrew Jackson Whittaker. He won a Powerball jackpot of $113 million, and eventually spent it all. It’s easy to just write him off as some lucky idiot who didn’t know how to manage his money. And sure, that’s partially the case. However, it’s also true that the rest of mere mortals (who’s accounts will never reach nine digits) will probably never understand the emotions of trying to handle that much money.

Like we said, handling money when emotions are high is extremely difficult. It really doesn’t matter whether they are happy or sad emotions, either. Both will cloud your better judgment. In many cases, it’s downright disastrous. Screwing up a major windfall is more common than you might think. According to the National Endowment for Financial Education, about 70 percent of those who win big (or otherwise receive a sudden and significant windfall) go bankrupt within a few years. Wow!

You Need a Plan

Now winning the lottery may not be in the cards for most of us. However, your chances of receiving some sort an inheritance is much higher. It’s estimated that $35 trillion in wealth is held by baby boomers in the United States alone. That sum is likely going to be transferred to the next generation in the next couple decades.

The stakes are high. So are the chances that you’ll receive some type of a windfall one day. It could be winning the lottery, an inheritance, a lucky stock pick, or even a major bonus from your employer. It might only be enough to pay off your credit card. Or it could be enough to change your life forever.

Are you ready if it happens to you? What would you do with a surprise bundle of cash? Take some time to formulate a plan, before emotions cloud your judgment. Here are a few things you should do if you suddenly receive a windfall.

Commit to Doing Nothing

If I could go back in time to give my mom some advice about how to handle everything when my grandfather passed away, it would be simple: “Do nothing.”

Not forever, of course. Legally, the estate has to be distributed in a timely manor. She still needed to make sure the will was handled and my grandfather’s final wishes were fulfilled. However, her primary focus should have been on mourning the family’s loss and celebrating my grandfather’s life. The windfall could easily have waited for a few months.

As for my mom’s own share of the estate, the best thing she could have done is simply sit on it. It’s not going anywhere. There’s always that urge to do something with any extra money as soon as you receive it. However, money and emotions don’t mix very well. Whether it’s a Powerball jackpot or an inheritance, it’s always best to take some time to let reality sink in.

Unless you’re struggling to put food on the table or on the brink of eviction (or foreclosure), there’s really so rush. Sit on the money and take the time to plan your next steps.

Don’t Forget Uncle Sam

Depending on the source of the windfall, you may owe taxes. And you never want to get behind with the taxman. Luckily, inheritances are taken from the estate before it’s distributed to you. Unless you’re the executor, you won’t have to really worry about it. Gift tax are paid by the giver, so that takes care of that.

If your windfall is from a lottery (or other gambling) jackpot, you’ll need o carefully work out how much you owe Uncle Same. Many major lottery organizations or casinos will actually withhold a certain percentage (24%, usually) of major jackpots when they give you your winnings. Keep in mind, though, that that probably isn’t enough if your winnings push your income into the highest tax bracket. You may need to worry about state taxes, as well.

A large bonus from work might work roughly the same way too. A promised $100,000 bonus is going to be much less, after payroll taxes. And you might owe even more when you file your tax return next Spring, depending on your individual situation. Make sure you have some left, or you could be stuck owing a large amount that you don’t have.

Eliminate Debt and Start An Emergency Fund

While it’s more fun to buy a motorcycle than to pay bills, do the smart things first. Eliminating your debts will free up your overall cash flow. Then you can spend it on more productive things that will increase your overall (and financial) quality of life.

Don’t forget about an emergency fund either. If your windfall is small, then you should start there. Start with having three-to-six months of expenses in a liquid fund that you can draw on in case of emergency. Then, use a chunk to eliminate debt. If that spends your entire windfall, that’s okay. It’s money well-spent, we promise. Obviously, if your windfall was much more substantial, you’ll want to start looking at the bigger picture. For example, does it even make sense to keep your mortgage, or should you just pay it all off?

Young couple happy about having extra cash

Shutterstock

Add to Your Investment Portfolio

Getting a windfall is a great way to jump start your investment portfolio. If a windfall is big enough to significantly change your financial picture, you should definitely consider using some to lower your debt. However, you should also start (or add to) a taxable investment account.

Investing some of that money (somewhat safely) will ensure that the windfall turns out to be truly life-changing money. It will keep growing over time if you manage it properly. (Or pay a professional to manage it for you.)

Adjust Your Asset Allocation

You should use this opportunity to fix and adjust your asset allocation. Maybe you’ve always wanted to have more (or less) bonds in your portfolio, but you just haven’t bothered. It wasn’t enough money to make a huge difference anyway, or you just didn’t have any extra cash to truly diversify your portfolio. Maybe you didn’t want to pay capital gains taxes in order to sell one investment in order to move the money around. Well, now is the time.

Another reason to reconsider your asset allocation is because your financial picture has likely changed (if the windfall is big enough). Do you want more bonds, which are safer, since you’re already comfortable. Or do you want more stocks, which carry a bit more risk, because the potential return is better? With careful management, you could even be setting up generational wealth for your heirs too.

Let’s say you’ve only invested in stocks in the past. However, you know you really should have 20% of your investment in bonds to dampen the volatility. Now that you have a large pot of money lying around waiting to be invested, it’s simple to buy some bonds without incurring any capital gains taxes.

Spread It Around

You probably have a mental list of things you’d like to buy. Or experiences you’d like to try. Or places you want to visit. There’s nothing wrong with that, but you should add in a few ways you can help others as well. If the windfall is large enough that you aren’t going to be worrying about your finances any more, then create some good karma by picking a way to give a tiny bit of it back.

How you choose to be generous with your donations is your own business. You could pick a charity that means something to you and make a donation there. (Just make sure you research it properly first.) Just be smart about your choices. Plenty of lottery winners find themselves unable to say no to the barrage of charity requests they receive. After all, how can you say no to starving children or homeless veterans or injured animals or whatever? You can’t say yes to everyone, so pick a personal cause (or two) and stick with those.

Consider Consulting Professionals

Let’s be really honest for a second. We’re glad you’re here, reading our website. We try our absolute best to give out meaningful and helpful financial advice. But if you just won a $100 million jackpot or inherited $20 million from your parents, we can’t help you. Not really, anyway. So go ahead and close this article, pick up your phone, and find professional help.

At the very least, you want to speak to a certified professional accountant (CPA). They will be able to advise you about any tax considerations you’ll be facing. You will also probably want to speak to a financial advisor, to help you manage investing and estate planning. Finally, you should consider consulting with a lawyer too. If your windfall is a significant amount, you want to protect it from any would-be scammers or speculative lawsuits. You also need to start (or update) your own will and last testament, now that your assets have changed dramatically.

When you’re talking to the professionals, consider as many options as possible. Get as much information as you can before you decide how to proceed with your money. Even if you end up not hiring anybody to manage your money, it’s always good to talk to more people to get ideas on how you should manage your funds.

Man in suit sitting in front of pile of cash

Shutterstock

You Could Still Lose It All

There really are many sad stories of “overnight millionaires” who squandered their fortune almost as quickly as they acquired it. Everyone says “I won’t let that happen to me,” but it still keeps happening. Don’t become a statistic!

Whether you come into a modest or substantial amount, it’s easy to get caught up in the excitement. A new house here, a new car there, and some generous checks written out to begging friends and family, and suddenly your pile of cash is looking a bit thin. Don’t fool yourself into thinking the money is infinite. Even a million dollars doesn’t go very far, these days. Spend wisely. Remember, no windfall is ever truly big enough if you aren’t responsible with it.

The Bottom Line

Enjoy your windfall, but also embrace the fact that more money also comes with more responsibility. Don’t squander it by only thinking of the present. That’s a recipe for disaster.

Think of the windfall not just as a onetime event, but as an opportunity to provide financial security for your future. By thinking more long term, you can turn a single financial break into a gift that keeps on giving.

David Ning

Experienced Finance Writer

David is a published author, entrepreneur and a proud dad. He firmly believes that anyone can build a solid financial foundation as long as they are willing to learn. He runs MoneyNing.com, where he discusses every day money issues to encourage the masses to think about their finances more often.

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