If you find yourself on the receiving end of a windfall—whether through the settlement of a lawsuit, a severance package, a family inheritance, or simply a larger-than-expected tax refund—following the advice outlined here will help you make the most of your good fortune.
Before you do anything
To avoid making choices you may regret later, take a step back and consider your situation, keeping these basic tips in mind:
- Know how much you really have. Oftentimes, recipients overvalue a windfall, failing to consider taxes and other factors. Before visions of sports cars and mansions start to fill your head, put a real number on the money you have. It’s a good idea to establish a budget to keep from spending too much, and avoid hasty purchases on big-ticket items.
- Don’t immediately quit your job. It’s also unwise to assume you can stop working. You’ll need to evaluate if you have enough money not only to replace your current income but to see you through retirement.
- Involve your financial advisor. Working with your existing financial plan, we can guide you in the right direction and help you put your assets to best use, including weighing the potential benefits of strategies such as trust funds and special types of life insurance.
Once you’ve evaluated your new financial situation, consider these smart spending strategies:
- Set aside emergency savings. If you don’t already have a bank account or money market fund with enough to hold you over in case of a “rainy day,” creating one should be a top priority. Ideally, you’ll want to set aside sufficient funds to cover your expenses for 6–12 months (3–6 months at the least).
- Pay off high-interest debt. If you have any debt, getting it out of the way is likely a wise move. High-interest debt, such as credit card balances and payday loans, can be particularly worthwhile to pay off in the short term.
- Evaluate your health and retirement plans. You may want to maximize your contributions to your employer’s retirement plan and consider the benefits of a Roth IRA. Also, if you contribute to a health savings account (HSA), think about paying your health care costs out of pocket and letting your HSA grow tax-free.
- Treat yourself a little. Clearly, it’s best to proceed with caution when making decisions regarding a financial windfall. At the same time, it doesn’t hurt to enjoy a bit of freedom with your newfound wealth. Perhaps you’d like to travel to a place you’ve never had the extra money to visit or treat the family to a fancy dinner and night out. A small indulgence could actually reduce any urge you might feel to spend the funds unwisely.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.