By Emily Guy Birken on 13 January 2020
Theoretically, a sudden windfall should reduce your financial
worries. Who doesn't appreciate getting suddenly richer?
However, making good decisions with a large infusion of cash can
feel overwhelming, especially if your windfall comes about because of something
negative. For instance, when I received a life insurance payout after my father
passed away in 2013, the money was both emotionally charged and
stress-inducing, and I was terrified of making a misstep.
If you've received a windfall, taking your time and making
intentional decisions about the money will serve you better in the long run.
Here's how you can do that.
Take a break before making any decisions
No matter how you received your newfound wealth, you're likely
to have a number of strong emotions associated with the event. And we all know
that emotions and rational decisions can struggle to coexist. That's why it's a
good idea to take a little time before you make any decisions whatsoever with
your new money.
If the money came to you because of a negative situation, such
as a death in the family, the end of a lawsuit, or the sale of a beloved
business, your emotions will inevitably color your view of the money. I
personally found that I wanted Dad's insurance money to no longer be in my
hands, because having it was a reminder of my loss.
Even if you have positive associations with the money (after a
lucky weekend in Vegas or a surprise profit-sharing bonus from work), those
fuzzy feelings may prompt you to make risky decisions to keep the good vibes
coming. Letting some time pass between receiving your windfall and deciding
what to do with it can help you view the money more dispassionately so you can
make the best possible decisions with it.
So how long should you pause before deciding what to do?
Depending on the size of the windfall, you might want to wait as long as six
months (or longer) before making any decisions. This will give you time to
process your emotions so that you're psychologically ready to make these big
choices. (See also: Don't Make These 6 Dumb Mistakes With
Your Financial Windfall)
Put it someplace safe
What you do with your money while you wait to make the big
decisions depends partially on where your windfall came from. Life insurance
benefits and other inheritance money can sometimes stay safely in the same
account you'll be paid from. In these cases, it's common that your money will
even earn some interest while it stays put. Simply keeping the money in place
can be a good way to give yourself the emotional breathing room you need
without worrying about making a preliminary decision.
Other types of windfalls, such as lottery winnings or an
inherited retirement account, may give you the option of taking a lump sum or
annual payouts. Choosing annual payouts (when available) will give you the
opportunity to make lots of smaller decisions over several years, rather than
overwhelming yourself with the need to make several big decisions at
once.
For when you have no choice but to take your entire windfall
into your hot little hands, stashing it in a money market account or high-yield
savings account can be a good way to keep it safe. (See also: Interest Rates Are Rising: Here's
Where to Keep Your Cash)
Consult a tax professional
The tax implications of your windfall could be a major deciding
factor in how you choose to use it. Some types of windfalls, like life
insurance benefits, can pass to you tax-free. However, for most types of
windfalls, you can assume that Uncle Sam will want his cut.
For instance, the killing you made at the blackjack table is
considered normal income to the IRS, which means you may have shifted into a
higher tax bracket when you walked off with a cool $40,000. If you don't plan
for this shift in your income taxes, you may find yourself staring down a nasty
surprise come tax time. Your CPA can help you figure out the best way to
navigate your sudden bump in income. For instance, they might suggest that you
maximize your tax-deferred retirement contribution this year to help offset
your windfall.
If you sold a business, inherited taxable property or accounts,
or even got a major bonus at work, a tax professional can help you determine
the most tax-efficient way to access and enjoy your new wealth so that you're
not stuck holding the bag when the taxman comes calling. (See also: 14 Reasons Why an Accountant Is Worth
the Money)
Get your financial house in order
Before you start making it rain, it's important to look at your
current financial situation and see how your new money can make it
better.
If you're carrying high-interest or revolving debt, using your
windfall to pay it off (or at least pay it down) may not seem like a sexy use
of the money. But reducing or eliminating your debt burden will give you more
peace of mind and more financial freedom in the future. That money will turn
into what feels like little windfalls every month when you don't have to send
most of your paycheck towards your debt.
Similarly, if you haven't prioritized saving for retirement,
your windfall can give you a great opportunity to improve your financial
future. Maximize your 401(k) or IRA contribution this
year (and enjoy the tax benefit), and use it as a springboard to send more
money to your retirement every year thereafter.
Finally, keep some of your windfall as an emergency cushion.
Knowing that you'll be covered the next time a financial emergency strikes is a
great gift to your future self.
Have some fun
It does feel good to receive a large amount of money, and having
a little fun with it is a great way to enjoy it.
No matter how a windfall comes into your life, splurging on
something that you couldn't or wouldn't otherwise have can be a great way to
enjoy your good fortune. Deciding to use a set amount of money however you
please is a life-affirming way to mark the occasion of your windfall.
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