A windfall of money is an unexpectedly large sum of money that lands in your bank account. Generally, a windfall of money comes from an inheritance, a lawsuit, an insurance payout, a salary bonus, an investment payout, or a prize-winning (yes, some play and win the lottery).
Receiving a windfall of money, although exciting, requires some planning. If not, this windfall may disappear as quickly as it came to you. It’s a good idea to set the money aside for at least one month before spending it.
Below are 7 things to do if you receive a windfall of money.
1. Determine your tax liability
Talk with your tax advisor to determine your tax liability and then set that amount aside in a separate bank account. If you spend your entire windfall of money and do not consider taxes, you will not have any money to pay the very likely hefty tax bill the following year. I suggest doing this right away so that you have a more realistic number for your new fortune. You can also check the IRS website for information.
2. Pay off consumer debt
I know this does not sound like fun, but once the debt is paid off and you are intentional about not getting back into debt again, your cash flow will increase and your financial health will improve. This gift of a windfall can help you get into better shape so that you can move forward with hopefully a clean slate.
3. Start or fund your emergency savings
If you do not already have an emergency fund, this is a wonderful opportunity to start one. If you are working on one, fund the remainder of your emergency fund goal. Having an emergency fund gives you security knowing that you will be okay when unexpected expenses or losses arise.
4. Start or add to your sinking funds (money buckets)
Sinking funds are separate savings accounts that are for a particular purchase. I’ve always called them money buckets, but I think sinking funds is the term most people find familiar. Sinking funds are often used for saving for a home, vacation, car, home repairs/renovations, starting a business, or any other large purchase you are planning.
If you have a goal, this is a good opportunity to jumpstart your sinking fund or add to it so that you can get closer to achieving it.
5. Indulge a little- after all, it is a windfall of money
A windfall of money is exciting and you may want to be spontaneous and indulge a little. This is okay but within reason. Experience something you would not ordinarily do, but you’ve always wanted to. Give yourself an amount of the windfall after taxes to indulge with. Put that money into a separate account so that you are sure not to overspend. When it is gone, it’s gone.
6. Give
You may consider donating some money, helping out a friend or family member, or using the money to buy supplies for a particular organization that is important to you. In some cases, people may approach you if they know you received a windfall of money. Be selective and intentional with your gift and give when it feels right for you. I suggest putting a limit on giving just as you put a limit on indulgence, but this is up to you and your values.
7. Invest your windfall of money
A windfall is a good opportunity to catch up on your retirement investments, or any other investments for that matter. Talk with a financial advisor about your options.
Summary
Receiving a windfall of money is a blessing that will help your financial health if you handle it wisely. There is no rush to decide what to do with this fortune you’ve received, so put it somewhere safe and don’t touch it until you have a plan. It would be a pity if your windfall blew away.
If you only do one thing on this list, I suggest determining your tax liability. Taxes are inevitable and depending on the amount you received your liability can be quite high, so determine that amount and put it aside. Then, make your plan based on what is left over.
Your plan does not need to be rigid. It needs to be comfortable for you and make sense of your bigger picture. A windfall of money is a gift that can help you get closer to achieving your goals.
If you don’t feel comfortable paying off all of your debt without having some savings, then do both. Contribute a certain percentage toward your debt and the rest to your savings. You might even want to divide the windfall into many different categories.
Example of what you can do with a windfall of money
Let’s say you have a windfall of $100K and you have $20K in debt and $5K in emergency funds. Nothing else. Here is an example of a balanced way to divide the windfall.
Estimated taxes. $25,000. (this is just an estimate)
Debt payoff. $20,000
Emergency savings: $5,000
Indulgence: $1000
Giving: $1000
Sinking fund for house downpayment: $48,000
Paying off the debt and adding $5K in emergency savings leaves you with much more cash flow each month to increase your house downpayment goal more rapidly. It also leaves you in much better shape for that mortgage loan approval since your debt-to-income ratio will be great. There is also some money set aside for indulgence and giving to give some immediate gratification and fun.
If you’ve received a windfall of money, be grateful. It is a wonderful opportunity to improve your financial health and get closer to achieving your goals.
Thanks for reading,
Jill