Abstract: Receiving
a sudden and sizable influx of cash may seem like a dream come true. It can be,
but many people get blown away by a windfall and end up in worse financial
shape. This article suggests some common-sense tips on creating a sensible,
long-term plan.
Don’t get blown away by a windfall
Receiving a sudden and sizable influx of cash may
seem like a dream come true. It can be, but many people get blown away by a
windfall and end up in worse financial shape.
Risky conditions
Perhaps the most obvious example is you may be
tempted to immediately buy an expensive new car or home. Or fraudulent
charities may come knocking. You can avoid these potential pitfalls by stashing
your windfall in a bank or money market account as soon as you receive it. Let
it sit there until you identify a few specific, reasonable goals — such as
funding your retirement or a child or grandchild’s education. Waiting at least
a month before you touch the money can help prevent impulse buys and other
mistakes.
Also,
you may owe taxes. Some windfalls, such as lottery winnings and
certain legal settlements, are subject to federal tax — as much as 37% federal
tax if your windfall pushes you into the top income tax bracket. State and
local taxes may apply as well. A tax professional can help you determine what
you owe.
Shelter from the storm
What
you eventually decide to do with your windfall depends on many factors. If you
have certain types of debt, you’ll probably want to pay it off ― especially
if it carries a high interest rate and the interest isn’t deductible. Also, establishing
or boosting your emergency savings can minimize the need to incur future debt.
Next, consider where you’d like to be five, 10 or
20 years into the future. Develop a budget that will help you move toward your
goals — whether that means retiring early, starting a business or something
else. You probably shouldn’t quit your job. Few windfalls are large enough to
see anyone all the way through retirement.
Long-term plan
A final word of warning: Be careful when asked for
money. Friends and family members may expect to share in your bounty or may
pitch “sure-fire” investment opportunities. We can help you formulate a
long-term plan to put a windfall to optimal use.
© 2021