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Smart ways you can do with an unexpected windfall.
Once in a while, you’ll hear stories about folks who just won the lottery or a house helper who ended up with big inheritance from the employer. Those are windfalls.
What about that unexpected cash you received during your birthday? The bonus you received last week, or the stimulus check you are about to receive? Those are also financial windfalls.
So, what to do with a financial windfall?
One wrong move can lead to irresponsible handling of a windfall which can eventually end up in financial disaster. I’m sure you didn’t miss the news about that lucky lotto winner who ended up broke in a matter of days, most of them actually.
If you’ve received a windfall, taking your time and making intentional decisions about what to do with the money will serve you better in the long run.
What is A Windfall
A windfall is a phrase used to describe an unexpected receipt of cash or profit. Think of bonuses, tax refunds, winnings, inheritance, gifts, and more.
In short, it’s free cash you get as a result of doing nothing or just exerting minimal effort.
A windfall can also be referred to as a bonus, fortune, a stroke of luck, godsend, manna, felicity, gold rush, or boom.
What To Do With A Financial Windfall
If you have the good fortune to find yourself in such a situation, there are several steps you can take to make the money last and set yourself up for a better financial situation.
1) Start An Emergency Fund
Having an emergency fund will give you a financial cushion during an unexpected financial struggle or financial emergencies that may come up.
These can include anything that you didn’t plan for such as medical bills, property damage, family emergencies, unexpected car repairs, or unexpected job loss.
Your emergency fund can give you the peace of mind to calmly deal with the stressful situation. It also provides a way for you to protect your savings and keep you out of debt.
If you don’t know where to start, here’s an article on how to create an emergency fund.
2) Pay Off Debt
If you have debts hanging around, this is your chance to eliminate them for good. Prioritize your high-interest debts like credit cards or personal loans, which has interest rates of 5% or higher.
Use your windfall to free yourself by paying off your high-interest debts and it will help you save more money long term.
3) Fully Fund An Emergency Fund
Financial gurus recommend that your starter emergency fund should be $1000.
However, depending on how much windfall you got, you can fully fund a 3-6 months worth emergency fund.
It is recommended that you do this after you’ve paid off your debt. Additionally, you should only use this fund for true emergencies and if you happen to dip into this fund, replenish it as soon as you can.
4) Invest Wisely
Now that you have a fully-funded emergency fund and a paid off debts, you can use the leftover money to invest.
You can choose to invest it in a high yield savings account like CITbank and watch your money grow.
Or, you can choose to be more aggressive with your money and use the discovery chart below to invest in stocks.
5) Set Aside Some For Fun
I know you have your financial priorities but since it’s a windfall, you are allowed to enjoy some of it.
You can set aside a small percentage of your windfall and add it to your travel sinking fund.
Similarly, you can buy something for yourself that will last long term. After all, you at least need something to remind you of that windfall.
6) Pay Off Your Other Debts
Now that you’re free from high-interest debts, you can now deal with your other lower interest debts like your home mortgage, car loan, or personal loan.
If you have multiple debts, use the debt snowball method to get you a good headstart in paying off your debts.
What To Do With A Big Windfall
A periodic small windfall is easy to manage, however, if you end up with a significantly big windfall, it can be overwhelming emotionally and mentally.
If you do end up receiving these large sums of money, take time to make thoughtful and educated decisions so that you can prevent disastrous and sad outcomes.
Here’s how you can do that.
1) Keep It In A Safe Place
While you are still taking the time to consider all your options on what you will do with the money, make sure to keep it in a safe place, not in your hot hands.
Consider keeping the money in the account that you’re paid from until you’re ready. However, if you have no choice but to take out the money, put in a high-yield savings account and allow it to grow.
2) Hire An Expert
Depending on the amount of your windfall, you might need to hire professionals such as a financial planner, a CPA, and/or an estate planning attorney.
They will help you get organized by creating a holistic financial plan, protecting your assets and determining your tax implications.
Seeking professional advice will help you prevent the chaos that can lead to financial disaster. After all, having a team of advisers can help you make the right decisions.
3) Know Your Tax Implications
Receiving a big windfall has its tax implications unless it is a life insurance benefit, which is tax-free.
Any other windfalls can be taxed as an income therefore, you should not be surprised with a tax increase come tax time.
However, a tax professional can help you determine the most tax-efficient way to access and enjoy your new wealth without worrying about Uncle Sam.
5) Consider Different Payouts
If you’re given payout options, consider receiving annual payouts rather than the lump sum. It will give you the chance to make lots of smaller decisions over several years, rather than overwhelm yourself with the need to make big decisions at once.
On top of that, it will prevent you from making those impulsive and irrational decisions that can lead to financial trouble down the road.
Final Thoughts On What To Do With A Financial Windfall
Every windfall is an opportunity to take a big step towards your goals — or a distraction that takes you further away. So the result will all depend on how you choose to spend the money.
Now, it’s your turn, have you decided on what to do with a financial windfall?
Related Money Management Articles:
- Best Tips On Money Management
- Best Tips On How To Pay Off Debt Fast
- How To Pay Off Student Loans Fast
- How To Make A Monthly Budget
- Dave Ramsey’s Baby Steps Simplified