A windfall, or the sudden inheritance of money from an unexpected source, may seem like the stuff of dreams. But it happens to a lot of people at one time or another – most people, in fact. Whether your windfall comes in the form of an inheritance, game winnings, the sale of a valuable heirloom, or some other source, it’s important to have a plan in mind for what you’d do with the money. Research shows that people tend to spend at least 40% of the money from a windfall immediately. What happens to the rest is a mystery, case by case. But we’re all familiar with the stories: taxes eat up a lot of it, friends and relatives come calling, bad investments get made. Many people who receive a windfall end up in a worse place than where they started, often within just a few months. In order to avoid this outcome, it’s important to have a plan made well in advance. It should include some or all of these facets.
- Don’t Do Anything For Awhile. If you get a windfall, put it into an interest-generating account and just wait. During this time, don’t tell anybody that you have sudden wealth. By keeping the money a secret, you’ll ensure that nothing bad can happen as a result of having it. Pay of any taxes you will have as a result of the sudden income. If you’re selling an annuity, take the time to find a good quote from the company that buys it. Then take your lump sum and make a firm plan with it.
- Allocate the Funds Specifically. Let’s continue with the example of the sold annuity. Now that it’s sold, and you’ve paid off any associated taxes, you are ready to make a plan. Take a look at your financial life. What debts do you have? How much are they costing you? What areas in your finances are working the most poorly? In this situation, I would recommend that you sit down with a finance professional. Lay out your whole money life out on the table, as well as your plans, goals, and those of your dependents and loved ones. Figure out where every dollars is going to go. Don’t forget to leave some to spend on fun, either! But if you don’t plan at all, chances are you’ll lose all of your money before you can make it do any lasting good for you.
- Stick to Your Plan. This one is pretty self-explanatory, but it’s important to state again. If you know how to make your money last, make sure you carry out the plan in real life.
If the end you’ll have a lump sum of money that lasts as long as you need it to. You can make big personal changes, perhaps, like paying off a loan, going back to school, financing a business, buying a house, etc. Even if you just decide to update a room in your home or take your family on vacation, you should make your windfall count. They don’t come around that often.