A financial windfall is a term that describes a substantial amount of cash that you did not expect to receive. This amount will vary for everyone, but it can include anything from getting a large and unexpected end-of-year bonus to winning the multimillion-dollar lottery.
When you receive a surprise influx of assets at any point in your life, you may wonder about the best course of action to take. Although receiving unanticipated additional funds are an opportunity to better your financial situation, the lack of planning could cause you to fritter away that hefty sum of cash.
The good news is that you can take measures to make that financial windfall last and handle any sum of money you receive with confidence.
Here are six strategies to keep in mind when you wind up with a windfall:
1. Pause Take a Deep Breath Before Doing Anything
Patience is important in this situation, as spending a huge amount of money you recently obtained can result in irrational decision-making. This scenario is highly common to lottery, casino,s or jackpot winners. When they win a large prize, they blow all their money and file for bankruptcy a few years after winning.
If you’re in this situation, refrain from rushing to spend your windfall in one go. Wait a few months before you arrive at a well-informed decision. This is what people call the decision-free zone or period.
2. Pay Off Your Debt
If you’re juggling debts right now, look at your windfall as a powerful solution to help you pay off your financial liabilities. When you eliminate debt from your life, you boost your monthly cash flow and help you achieve your financial goals faster.
Create a plan to pay down or completely knock off ongoing and substantial obligations, such as credit card debt, student loans and mortgages. If you’re getting your windfall in installments, follow a debt repayment strategy to bring down your outstanding balances over time.
3. Build Your Emergency Fund
Before you venture into real estate investment or stock purchases, you’ll want to create an emergency fund that’s worth around three to six months of your total expenses. You could place your windfall in a place that you can access easily, such as a high-yield savings account. Make sure that you use the money you place in your contingency fund for true emergencies, such as medical emergencies and unforeseen layoffs.
4. Purchase or Pay Off a House
If you’re looking to buy a home, you could a portion of your financial windfall to meet the down payment requirement. When you’re currently paying your home loan, you could reserve a part of your windfall on monthly mortgage payments.
Buying a home outright is another option, so long as you don’t completely drain your windfall fund at the end of the day.
5. Be Wary of Long-Lost Friends Asking for Help
When people hear about your financial fortunes, you may find long-last family members and friends showing up at your door and becoming friends with you all of a sudden. These people may be looking to re-establish ties with you and get a percentage of your wealth.
Although the thoughts of reconnecting with friends from yesterday and hearing congratulations sound pleasant, be wary if the conversations become money-related. If these people begin asking for cash or suggesting investment strategies, don’t say “yes” to their requests or ideas. Instead, turn to one of these trusted professionals for assistance:
• Estate Planning Lawyer – This person will help you come with an estate plan that factors in your windfall assets.
• Financial Planner – Hire this individual to assist you in handling your money wisely.
• Tax Advisor or a Certified Public Accountant (CPA) – This person will develop a tax strategy for your windfall assets.
At the end of the day, never let a person with limited financial knowledge and experience tell you what to do with your money.
6. Splurge a Small Portion of Your Windfall
The words “small portion” is important, as you don’t want to end up depleting your windfall funds for your entertainment or enjoyment. You’ll want to set aside no more than 10 percent of the money for your wants.
When using this money, shop wisely to get more value for your purchases. This means keeping an eye out for huge discounts, waiting for the prices to drop and shopping for big sale days, like Black Friday.
Also, don’t forget to track your spending when you’re on a buying spree. If you know you’re going to spend more than ten percent of your windfall, stop, step back and reassess your spending.
Windfalls don’t come often. So make your good fortune last as long as possible by protecting your newfound wealth.
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