When you receive a sudden windfall from an inheritance, legal settlement, lottery win, or gift, you may wonder what the best course of action is. This extra money is an opportunity to improve your financial situation, but many people waste the money because they don’t have a specific plan for preserving it.
Assess Tax Implications
First, consider the tax implications of the money you receive, which depend on the source of the funds, whether they are taxable or not. Talk to your tax accountant or another financial professional to determine if the money is tax-exempt. Most money is not, so you should set aside enough to cover taxes or pay taxes now.
Consider Different Payment Options
If you have the option to receive the money monthly or annually instead of in one lump sum, it may help reduce the urge to splurge. Lifestyle inflation is a real danger when you suddenly have extra funds and spend a little here and there over time. If you can receive the money annually, you may also be able to spread tax liabilities over time, but consult a tax professional for further advice.
Allocate a Small Portion for Fun
Set aside a small percentage for entertainment or leisure activities. Generally, this should not exceed 10 percent of the money. Use this money wisely. Shop sales, wait for prices to drop, and seek out other deals so you can get more value for the money you spend. You may feel peer pressure to spend all your money on fun instead of using it wisely. It’s important to enjoy yourself, but you should track your spending and stop once you reach the amount you set. The majority of the money should be used to cover other expenses and invest for your future.
Create a Financial Plan
Before making any further decisions about your money, you should create a financial plan if you don’t already have one. If you already have one, you may want to update your goals. Revise your goals and direct the bulk of the money toward your long-term financial plan. This way, you can accelerate the process and achieve your goals much faster.
Establish or Update Your Estate Plan
If you already have an estate plan, it makes sense to review it periodically anyway, but you may need to make significant changes after receiving a sudden windfall. It is important to have an estate plan to ensure that your money is distributed exactly according to your wishes after your death. A detailed estate plan can make the process of distributing wealth less awkward for the beneficiaries who are also grieving your loss.
Pay Off Your Debts
If you have outstanding debt payments, you can use this money to pay off your debts. However, if you are not fully committed to staying away from debt, you should invest the majority of the funds. Otherwise, you will find yourself back in debt in just a few years and will have nothing to show for the sudden windfall. If you already have a strong financial plan, the first step should be to eliminate debt. Once you pay off your credit cards, you may want to close the accounts.
Establish an Emergency Fund
After you eliminate your debts, you should create an emergency fund that is equivalent to about six months’ worth of income. This money should be placed in a high-yield savings account. This money should only be accessed for true emergencies, such as job loss or medical emergencies. When you use part of the emergency fund, you should replenish it using your monthly income. For all other expenses, you should plan and save.
Invest
Your Money
After funding your emergency account, invest the remaining money. Look for a good financial advisor to help you. One way to invest money is to choose high-quality mutual funds with a good track record of profits and low fees that match your risk tolerance and investment goals. You may find a financial advisor through your bank or through referrals from a friend. Mutual funds spread risks over several stocks, but you should also diversify your investments across several different mutual funds and types of mutual funds to reduce risk.
Paying Off Debts or Considering Buying a Home
If you don’t already own a home, this money could be a great down payment for a home or to buy it outright. You may choose to invest a large portion of the money and use some of it for a down payment. If you buy the home outright and have remaining funds, invest the amount that would have been your monthly mortgage payment each month so you can truly build wealth. Moreover, owning a home outright can free up the money you earn in each paycheck so you can add extra funds to your investments.
Caring for Your Financial Responsibilities
You may find that you have a financial responsibility to someone else alongside sudden wealth. For example, if your parents have passed away and you have become a guardian to your siblings, you need to plan with those responsibilities in mind. It’s important to ensure that their needs as well as your own are met through a trust or similar financial vehicle that protects and preserves the money they are rightfully entitled to. This may also change your long-term career and education plans. You may want to consult an attorney and create a will for the money that will help cover education expenses for those you are responsible for. A properly organized will can help protect the money in various ways, especially if they are not making the best choices once they turn eighteen.
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Source: https://www.thebalancemoney.com/what-should-i-do-with-a-sudden-windfall-2385942
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