How do you handle a large financial windfall?
Receiving a large sum of money may seem like an uncommon event, but it happens more often than you may think. Some ways of receiving a financial windfall include receiving an inheritance, life insurance payout, lottery/gambling winnings, cash settlement, selling property or investments, and more.
What to do when you receive a large sum of money
Everyone has a different personal financial situation, so you should tailor these tips to your needs. If in doubt, seek professional assistance.
Pay associated taxes
This is a biggie that many people forget. Many financial windfalls are taxable. Things like lottery or gambling winnings, some cash settlements, sale of investments or property, and some inheritances may be taxable. Things such as life insurance or some inheritances may not be taxable. This is definitely a situation where you want to visit an accountant for help determining how much, if any taxes are due. Set aside that amount of money before you do anything else, then use the remainder to meet your financial goals.
Don’t tell anyone
Sure, you can tell your immediate family, but you want to avoid broadcasting the news to people who don’t need to know. Everyone has an opinion, and the multitude of voices can make it more difficult to decide the best course of action for your situation. On the far end of the spectrum, broadcasting your new found fortune may set you up as a target for physical theft, identity theft, con artists, or people looking for handouts.
Sleep on it
No, I don’t mean go to the bank and ask for thousands of dollars in singles so you can roll around in it like a cartoon character. I mean wait a day or two, or even longer, before making any decisions regarding how to spend, save, or invest the money.
Receiving a large sum of money can be a huge shock to the system, especially if it is a life insurance settlement or inheritance. If you are dealing with other stressful situations in your life, it’s best to resolve those situations before making any big decisions that will have a lasting impact on the rest of your life.
Take some time to let things settle, then work on a plan.
Examine your financial position.
The best way to do this is to perform a financial checkup, which includes setting short and long term financial goals, reviewing your budget, examining your debt, savings, and investments, risk management (insurance), and other financial needs.
Depending where you are financially, you may find some of the following ideas good options for your financial situation:
- Think about your financial goals. Setting goals is the most important thing to do when you begin investing. Do you want to get out of debt? retire in style? buy a house in the next few years? These are all very important questions to ask before investing money or making large expenditures such as a new vehicle or home improvement.
- Establish an emergency fund. $1,000 for a small emergency fund, or 3-6 months of living expenses for a fully funded emergency fund.
- Pay off high-interest, unsecured debt. (credit cards, personal loans, more on how to get out of debt).
- Pay off other loans. (car loans, HELOC, student loans, mortgage).
- Begin a retirement fund. Roth or Traditional IRAs are a good place to start.
- Build wealth. Invest for retirement, in taxable investments for wealth building, college savings, etc.
- Have fun. If your financial house is in order, use the money for a little fun – buy a sports car, take a once in a lifetime vacation, or cross something off your bucket list.
Meet with a professional
Finally, consider meeting with a financial planner to help you decide on the best course of action. Be sure to research the financial planner you wish to use and do a background check on them. Follow that up with an interview before selecting their services. This can help you decide which financial planner is best for your situation.
Take your time and decide the best course of action for yourself
Receiving a large financial windfall can be a blessing, or it can be a curse (just look at the dozens of lottery winners whose lives took a turn for the worse after winning millions of dollars). The key to successfully managing your financial windfall is to take the time to decide the best course of action for your needs and your situation – then set goals and make it happen.
Related Post: How We Manage Our Money on a Daily Basis