If you’re fortunate enough to receive a windfall of cash in your lifetime there are several ways to make the most of it. Every so often the headlines include a story about a lottery winner or professional athlete who’ve earned large amounts of money in a brief period of time before going completely broke. Don’t be this person! Take your time, include trustworthy people, prioritize your goals, and work with a professional before making any quick decisions. This article will explore what to do with a windfall of cash to avoid any costly mistakes.
Being a tribal member, I hear stories of fellow members spending their tribal inheritance without concern as soon as they receive it. Without taking a moment to pause and think about how it could dramatically change their lives for the better. The windfall of cash is sudden, and without proper personal finance education, they’re at a disadvantage to handle the money sufficiently. Oftentimes blowing it on several large sporadic purchases. If only they were provided education and time to understand compound interest, the time value of money, and opportunity cost, among other personal finance and investing principles. I believe education could sway their decision making. My goal with this article is to help educate people who receive these large sums of money to take time to make thoughtful and educated decisions for their future.
Below is an overview of steps to take in the event you receive a windfall of cash.
1. Patience is Key
After receiving the windfall take a deep breath and realize nothing has to be done immediately. Patience will go a long way in ensuring you think clearly and take time to go through the remaining steps. Whether the money was expected or unexpected can also have an impact on how a person reacts.
If the money is unexpected it’s even more essential to be patient. If the money is significant it can be overwhelming emotionally. Especially for someone who’s not used to having a lot of financial flexibility and can lead to disastrous and sad outcomes. I’m not saying it’s not okay to splurge a little to celebrate the windfall, but that when our emotions come into play, we oftentimes don’t make rational decisions.
Waiting for the dust to settle will allow you to think clearly, rationally, and make the best decisions regarding your new financial situation.
2. Prioritize your Goals
As with anything related to personal finance, everything should be viewed holistically. How does this windfall of cash fit into my entire financial picture? My family’s financial picture?
If you hold high-interest debt on student loans, mortgages, or business loans, you may consider paying these off first. Or maybe you’ve wanted to begin funding a college savings account for a child. Whatever your goals may be, take the time to prioritize and make smart decisions about what is necessary, versus what is merely a “want”.
If you determine that retiring early is important and should be prioritized, ensure your actions align with that goal. Set aside the vast majority of the windfall in a taxable brokerage account to invest. Determine when you’d like to “retire” in the traditional sense, and have a financial planner help you determine whether it’s feasible with your newfound cash. If you’re given a particular budget for annual and monthly expenses, stick to it, otherwise, it throws off your entire retirement or “financial independence” plan as I prefer to call it.
3. Include Decision Makers
Whether you’re single or married, it’s important to have someone you can trust included in money conversations. Sadly, it’s become very taboo in society to discuss money even among families. Resentment, sadness, and a variety of other emotions can come into play if families avoid openly discussing money.
By including a spouse, parents, grandparents, or whoever it may be in a conversation about a windfall you’re getting another trusted perspective. In the case of a gift or inheritance, you’d want to know what a parent or grandparent wished the money to be used for. Just as if you were to make a gift to a child or charity. What’s the purpose of this money?
4. Get Professional Advice
Depending on the sum of money received, you may want to seek professional advice from a financial planner, lawyer, and/or CPA.
A financial planner will help you develop a long-term, goal-oriented, and holistic financial plan. This will not only help you prioritize your goals further but give you realistic expectations and recommendations about what to do with the money. Whether that’s to invest it, use towards paying off debt, buying a home, funding kids education costs, or more likely, a combination of things.
Depending on how large your net worth is after receiving the windfall, it may be smart to consult an estate attorney. Estate attorneys help protect your assets after your passing and allocate them to the people, or charities you want. It’s especially important if your net worth is substantial. If you were to pass without a plan in place, the IRS can collect up a substantial amount of your assets. Not to mention the chaos that would ensue with family or other loved ones left to figure out how to split the assets accordingly.
A CPA will help you determine the tax implications of the windfall. Often times people forget the tax consequences and are caught off guard when they see tax figures for the previous year. Setting aside a portion of the windfall in order to prepare for any tax consequences can help avoid having to scramble come tax time. A CPA will help plan for this accordingly.
A couple further tips to avoid when receiving a windfall are splurging and sharing the information with individuals who aren’t key decision makers or influencers.
Making hasty decisions and splurging on a new car, new home, or another large purchase can end badly. Be sure the purchase fits into your long-term financial plan and is not just a temporary satisfaction. While a $60,000 windfall may seem like a lot up front, it can be spent fairly quickly. Be sure it’s used meaningfully and aligns with your goals, which ultimately results in the best decision for you.
Lastly, including people who aren’t necessarily decision makers or large influences in your life regarding the windfall can have dramatic effects on personal relationships. Unfortunately, friends and even family may look to you for loans, or cash gifts if they know you received a large sum. Money has the ability to put strains on relationships. By keeping the information to decision makers and people you trust, you can avoid any uncomfortable conversations with friends and family who may only have their best interest at heart.
A windfall of cash can be a great blessing. Ensure you take the time to prioritize, get professional advice, and include key decision makers before making any hasty decisions. Patience is key!
If you need assistance in planning what to do with your windfall of cash, schedule a free consultation with us today.
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!