Who hasn’t dreamed of winning the lottery, hitting the jackpot, or receiving a huge inheritance from some long-lost uncle? It’s fun to imagine what you would do with a big pile of unexpected money that magically falls into your lap. While most of us won’t be winning the Powerball anytime soon, it is likely that we’ll be blessed with smaller financial windfalls now and again throughout our lives. It’s easy to get caught up in the excitement of receiving unexpected money, but important to think through how best to spend it. Below are six steps to follow to make sure you make the most of your financial windfall.
1. Sit on it. This is the most important thing you can do after receiving a financial windfall. The last thing you want to do is impulsively spend your money on things you’ll regret a few months later. You want to allow time for emotions to subside before making any major decisions, especially if you’ve received your financial windfall due to the death of a loved one. Wait a month or two before you spend a penny, your future-self will thank you for it.
2. Understand the tax implications. Chances are the financial windfall isn’t coming to you free and clear. Uncle Sam is going to want his share too, and you need to know exactly how much that is going to be. You’ll have a big problem if you get a large tax bill in the mail and the financial windfall has already been spent. Consult a professional if you need to, just make sure you know what you owe before you spend.
3. Revisit your goals. What were your financial goals prior to the windfall? It’s important to make decisions congruent with those goals now that you have some extra money to fund them. If you have never even considered buying a boat before, then that’s probably not the best use of this money. If however your number one goal is early retirement, then a financial windfall can get you one step closer to that dream. Whatever your goals, make sure they’re at the forefront of your mind when deciding how to use this extra money.
4. Seek professional advice. If you’re not sure what the best way is to use the windfall then ask a professional. A fee-based financial planner is in a great position to objectively look at your overall financial picture and advise where the money could be best put to use. This is an important decision, so soliciting professional help is always a great idea.
5. Remember those less fortunate. When a financial windfall comes your way think about how you might use a portion to help someone in need. Whether it’s a struggling friend or family member or a charity close to your heart, sharing makes the windfall so much greater because you get to pay it forward.
6. Save some for fun. Make sure you set aside a portion of your windfall to splurge and have some fun! Maybe you’ll go out to that super fancy restaurant you’ve been dying to try, or buy that new custom suit you’ve been eying, or take the family to Disney World! Whatever it is, enjoy, because as we all know financial windfalls don’t happen every day.
Windfalls come in all shapes and sizes (expecting a tax refund this year?). Next time you find that you’ve received one, make sure to use these 6 simple steps to ensure you make the most of it.
Twitter: @FrugalFinance1 and @seeitmarket
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of her employer or any other person or entity.