While it’s tempting to treat a windfall as “fun money” and spend it right away, planning before acting can help you maximize the impact of that windfall.
Before doing anything, let the money sit for several months. A sudden influx of money is a temptation too strong for even the most rational among us. Put it somewhere safe where you won’t be tempted to touch it while you weigh your options. With interest rates on the rise, many savings accounts, CDs and money market accounts have attractive interest rates available.
Once your windfall is stashed away, take time to consider your options. Make a list of the things you’d like to do with the money, then weigh the pros and cons of each. And don’t just list the “fun things” — remember to also include things like bulking up your emergency fund, replacing that ancient furnace or paying off some debt.
If the size of your wish list exceeds the size of your windfall, you’ll have to prioritize. Generally, we’d recommend tackling high interest debt first — if your interest rate exceeds your typical investment returns you’re better off getting rid of the debt. Anything left of your windfall (or the money you were using on debt payments) can go to your remaining goals.
Next, if you don’t have three to six months of living expenses set aside in an emergency fund we’d recommend funding that next. Once you’ve addressed your high interest debt and have fully-funded your emergency fund, it’s time to tackle the other things on your list.
If you find yourself torn between the remaining items on your list it may be a good idea to speak with a financial adviser. He or she can help you develop a plan that is specifically tailored to your financial goals.
Understand potential tax consequences of a windfall.
Another benefit of working with a financial adviser, especially one with tax expertise, is that they can help you understand and plan for the potential tax consequences of the windfall. While some windfalls like a life insurance payment are generally tax-free, others, including an inheritance, could come with a significant tax bill. For example, if your windfall will be treated as taxable income you may decide to maximize your pre-tax retirement plan contributions to get the income deduction.
After you’ve evaluated and prioritized your options, go ahead and set aside some to spend on yourself. Just remember to keep the size of the splurge proportionate with the size of the windfall. By allowing yourself a small pool of “fun money” you won’t end up feeling deprived and you will keep yourself from overspending.
Receiving an unexpected windfall is a great feeling. Rather than rushing out to spend that money right away, take the time to develop a strategy for how to make the most of it. Review your values, and make a plan that’s in alignment with them. As great as receiving a windfall can feel, making the most of it feels even better.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on News Radio 830 WCCO on Sunday mornings. Email Bruce and Peg at email@example.com. Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL.