Our Top Tips to Confidently Handle a Windfall

Should you find yourself in a situation where you received a large sum of money for a reason out of your control, do you know how you’d handle it? 

Before you race to the car dealership to test drive that sports car you’ve always dreamed about, you should check out our tips on confidently handling a windfall. 

Key Takeaways:

• A windfall can have both emotional and financial impacts.
• It’s essential to have a comprehensive plan of how you’ll use your sudden wealth. 
• When setting goals, you must consider your values and the “why” behind the goal. 

What Is A Windfall?

The definition of a windfall surrounds any significant unexpected monetary gain resulting from an event out of your control. Think of things like winning the lottery, transitioning from a part-time position to full-time, graduating with an advanced degree and receiving a pay increase, earning a large bonus, or finding a rare comic book at the thrift store and selling it for a profit.

Another example is retiring and realizing the money that was once in your retirement savings bucket is now your “to be spent” bucket. 

There are also ways to experience a windfall that aren’t so exciting. Examples might include receiving a settlement from a court case or inheriting money from a loved one who has passed away. 

Even more serendipitous reasons could include a sudden change in market structure, trade policy, government statutes, etc., positively impacting your investments.

You don’t need to stumble across an undiscovered gold mine to experience a windfall. That’s why it’s essential to be prepared!

Emotional Impacts Of A Windfall

Think of how your life could change due to sudden wealth. Unfortunately, not all of those changes are always good. Additionally, some non-tangible impacts of sudden wealth may cause you to spend it without putting it to practical use. 

The nature of how sudden wealth came to you can have emotions tied to it. For example, if your sudden wealth is inherited from a family member passing away. 

Before worrying about specific financial plans, you must take time to grieve and sort through your emotions, priorities, etc. 

Of course, the nature of how you received your sudden wealth also has tax implications. If you receive a settlement from a court case, the IRS will treat it differently than someone who won the Powerball jackpot. So, make sure to take this into account when you start making plans for how you’ll use your windfall funds.

Potential Consequences Of A Windfall

The National Endowment for Financial Education reports that 70% of people who come into sudden wealth are “broke” within a few years. 

Now, you might be wondering how that’s possible. Unfortunately, having a windfall dwindle quickly can happen if you aren’t prepared. 

What would you do if you won the lottery? Immediately posting the news on social media, quitting your job, and buying a private jet are not the first things you want to do. 

Those with sudden wealth could see family and friends coming out of the woodwork. Your long-lost cousin Sam might come to you with his new invention idea and ask you for a loan to get started. 

And while you may want or even plan to share some of your newly earned wealth with family and friends, it’s better to work through a complete financial plan before you start “spending.” 

While you may be tempted to be Sam’s angel investor, you likely shouldn’t jump into high-risk investment scenarios. 

In addition, you may be tempted to immediately buy a new home or car or take a trip worldwide. Not that you can’t or shouldn’t, but the best practice would again be to make a comprehensive plan before making expensive purchases. 

So, what should you do?

The First Step

No surprises here! If you don’t already work with a financial advisor, you should find one.

A financial advisor will work with you to help determine how the windfall falls into your financial life planning. By working through your personal goals, values, and, ultimately - financial goals, you will naturally start to unveil a roadmap for your finances. 

At AVID Planning, we view your money as more than what it is on the surface. Some think reaching a certain amount of money in a savings or retirement account is your ultimate financial goal. But money is the tool you use to reach your goals. 

How To Set Goals That You’ll Achieve

Let’s switch gears and talk about goal setting. Did you make a New Year’s resolution this year? What does that goal look like, sound like, or mean to you? 

If your goal is to “exercise more,” we challenge you to develop it further. Ask yourself these questions: 

• What does “more” mean to you? Running three times a week, walking the dog every day, etc.?
• How will you know if you have met your goal? How will you measure it? 
• What’s the timeline in which you hope to achieve your goal? Six months, one year, two years?
• Does the goal mean something to you? What’s the “why” behind exercising more?

Let’s apply this same idea to financial goals. How can you boost a goal of saving one million dollars before retirement? 

First, we need to focus on the “why.” Why specifically do you want to save one million dollars? 

• Do you want to live in a particular location?
• Do you want to be able to travel? 
• Are you planning for unexpected expenses? 

Creating specific, meaningful goals gives you the motivation to achieve them. Traveling to Asia likely means more to you than a number on paper. 

Utilizing Your Windfall In A Positive Way

Now that you have a financial advisor on your team that knows your values and goals, you’re ready to start making decisions regarding your windfall. 

Your values will ultimately guide how you’ll use your sudden wealth. If you value spending time with your family, maybe that means cutting down your work hours to part-time. Or, if you’re saving up to buy a home or are looking to start a family, maybe you start by paying off your debts. 

What’s important to you and what you need to push you towards achieving your goals will determine how best to utilize your windfall. If becoming your cousin Sam’s angel investor is valuable to you, go for it!

If you’re in a situation where you’ve come upon sudden wealth and are unsure where to start, please reach out to us today. We’ll help you create a financial plan with a purpose.