What if …
- You win a lottery?
- You inherit a chunk of money?
- You receive a severance package?
- You receive a life insurance payout?
These are just a few ways that you could come into a chunk of money.
Windfalls are an unexpected good fortune, typically one that involves receiving a large amount of money.
You might not consider all the ways you could come into chunks of money “windfalls,” but no matter what you call it when you receive a large sum of money, you are wise to have a plan around what you are going to do with it. Here are some thoughts to help you out with the process.
Assess your current financial situation
a. Create an emergency fund if you do not have one. Most financial planners recommend you have 3-6 months of your monthly living expenses available as a fund for the unexpected. This amount varies depending on how reliable your sources of income are. If the money was from a severance package, this fund should include costs for those months you expect to be looking for another job.
b. Pay off high-cost debt and low cost too if you can. By paying off your high-cost debt first, you are maximizing your reduction in financing costs.
c. Live your Dream Maybe you want to take some courses, start a business or go on a vacation. Perhaps you have a deep need to be charitable with your time or money, and this windfall allows you to do others. Just don’t squander it here and there without a thoughtful approach. Windfalls usually don’t come along often, and you sure don’t want to live with the regret of not using it wisely.
d. Taxes You may have to pay taxes on the windfall so be sure to know if you do and set that money aside.
e. Income Maybe you invest your money to create an additional income stream. If you are not sure what to do, reach out to an investment advisor to help you with this decision.
Consider your future
a. Do you have unused contribution room in any of your tax-sheltered accounts? Fund these if you can.
b. Do you have any significant expenses coming up that you can use the money to fund? You might want to save for your children’s schooling, down payment on a house, their wedding, a car or a new roof on your home.
If you are likely to blow the money, perhaps talk to an advisor about how to protect you from yourself. Given that 70% of lottery winners lose it all, you would not be alone in this problem. An advisor might suggest taking ½ of the windfall and locking it in, perhaps through an annuity, depending on market conditions.
Determining what to do with a windfall should not be a rushed decision. Take the time you need to come up with the right strategy for your situation, and that hopefully allows you to enjoy it for a long time.