No matter your personal financial situation, receiving an unexpected sum of money — a windfall — is a pleasant surprise. 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. Here are some things to consider.
Leave it Alone, For Now
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 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.
Prioritize Your Options
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 advisor. He or she can help you develop a plan that is specifically tailored to your financial goals.
Understand Potential Tax Consequences
Another benefit of working with a financial advisor, 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.
Go Ahead and Splurge — A Little
After you've evaluated and prioritized your options, go ahead and set aside some money 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.
This article originally appeared in Pioneer Press on July 14, 2019. You may view the article here.
Series 7, 53 & 63 Securities Registrations,1 Series 65 Advisory Registration,† Insurance License Peg was attracted to the financial services industry early in her career. She feels fortunate to be able to use her 30 years of in-depth knowledge working alongside Preston, the Roundtable™ and their staff to prepare clients for retirement. A lifelong learner, she enjoys collaborating with her team to stay on top of the best practices regarding comprehensive planning....Read More