How to Manage a Windfall

It’s a challenge many people dream about having — suddenly coming into a large sum of money. But, it’s important to act thoughtfully and responsibly once you have it. The National Endowment for Financial Education noted in a study that an estimated 70% of people who suddenly received a large sum of money will lose it in about seven years.

If you’ve suddenly received a large sum of money, whether from an inheritance, gift, sale of a business or even winning the lottery, consider these suggestions:

Take your time. Avoid immediate impulse decisions, especially in regard to large life-changing windfalls. Set the money aside in a bank or money market account (someplace reliable) for several months, while you consider your goals and visions for the funds. Patience is the operative term when deciding how to move forward with newfound wealth.

Determine your tax situation. A windfall often involves tax obligations. The government often takes its share upfront, such as in the case of lottery winnings and certain legal settlements. It can amount to 39.6% — or more — of federal income tax! There may be state tax obligations too!

Consider paying off debts and increasing savings. If you have high-interest-rate debt, such as credit cards, paying these down can provide a higher return on your money. It’s important to invest at least some of the money for your future.

Keep working. It’s not often that a windfall is large enough to give someone financial independence for the rest of their life. Don’t quit your job until you’ve thoroughly analyzed all of the financial implications that come along with the money. For example, the amount remaining after taxes, any debts that still remain, and what your future financial obligations may be.

Form a plan. Consider where you’d like to be at various timeframes in the future. Develop a budget that will help you move toward your goals — whether that means retiring, buying a vacation home or setting up trust funds for your children.

Be careful when asked for money. Sharing your newfound wealth through gifts to family members and friends is wonderful when done wisely. Supporting a cause or organization you care about is a great way to make a difference with your windfall as well. At the same time, if you accede to every request, you’ll quickly deplete the funds.

Have some fun. Now for the best part. Allow yourself a splurge! Perhaps it’s traveling to a place you’ve dreamed of seeing or purchasing a nice car. It’s OK to enjoy your windfall in moderation. Just recognize that you don’t want to blow the entire amount on frivolous items that don’t provide a sound foundation for the future.

A windfall can be wonderful, but handling one wisely takes patience, discipline, thoughtfulness and planning. Your tax and financial professionals can provide advice that will enhance your financial security and help achieve your goals.

© 2016

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