Odds are that at some point you will receive a financial windfall.

Windfalls can come from lots of different sources; inheritance, divorce settlement, insurance proceeds, sale of small business, severance or retirement package and, yes, a lottery win. It may seem like a problem you’d love to have, but it can be life changing, and deciding what to do can be a bit overwhelming.

You may feel the urge to spend, invest, move, quit your job, or give to others. But, if you want your windfall to last, you need to take the time to make well thought out decisions.

Sudden Money: How To Manage A Financial Windfall

What not to do

Woohoo! Free money! Even a small amount can make you feel like you can do (and buy) anything because the money seems infinite and there’s the euphoria of buying stuff.

Julian had been earning a modest income until he was laid off. He received a $10,000 severance package. This was more money than he had ever had at one time. He decided to have some fun and took his best buddies to Vegas, eventually blowing more than half of the money he needed to live on until he could find other work.

Whether large or small, unexpected money – and sometimes expected money – doesn’t mean you can be irresponsible with it and go on a spending spree. You think it will last forever but you won’t believe how easy it is to blow through money if you’re not being vigilant.

Studies have shown that most people who get a financial windfall spend the entire amount within five years.

Emotional issues

A lot of emotions can be attached to this sudden wealth depending on where the money comes from.

If your windfall came from an inheritance, it means the death of someone important in your life. Insurance settlements are also associated with periods of high stress such as death, accident, or housing disaster. Divorce means the loss of an important relationship. You may be felled by grief and indecision.

Often people can’t bear to touch the money. They say things like, “It’s for the kids,” or “My Mom was a very frugal, conservative saver, I don’t want to jeopardize the money.”

If you receive a large amount, investment salespeople will become your new best friends – watch out for too-good-to-be-true opportunities. The people you hang out with may change. Don’t be surprised if friends and relatives start hitting you up for loans. Children may become demanding; family members may feel resentful or predatory.

You may be perfectly willing to invest, give money to family and friends, or donate to charity, but this is not the time to take big steps, even if people pressure you. You need to just park the money until you can think clearly and prioritize your wish list.

Assemble your team

For any large sum of money, begin by assembling a team of professionals. You are going to need the following:

  1. A financial adviser  Your adviser can help you walk through issues of spending, debt repayment, planning for the future, and charitable giving, and determine what makes the most sense for you.
  2. A tax specialist – You need to understand what taxes you will pay and whether there are any strategies you can use to lower the bill.
  3. An estate planning lawyer – A lawyer will update your estate plan, can put trusts into place that minimize estate taxes, and structure charitable bequests.

Consider all possibilities

What you end up doing with your lump-sum is largely dependent on your specific financial situation. As you weigh your options, consider these actions:

  • Pay off high interest debts
  • Create an emergency fund if you don’t already have one
  • If you have no money saved for retirement, have a whack of unused RRSP contribution room, or could use the tax deduction, you’ll want to put some into your RRSP
  • Revisit your investment plan. Your windfall may mean changes to your investment goals or risk tolerance.
  • Invest in yourself. You could go back to school to learn new skills, open that business you’ve been dreaming of, or finally start on that great novel you’ve always wanted to write.

Of course, you may also want to splurge a bit. If this is truly a windfall it’s natural to want to treat yourself and your family to something special – such as a new car or a dream vacation with your spouse.

Should you pay off your mortgage?

Depending on the amount of your sudden money, you may have to make some choices. If your debt represents your entire windfall, you’re going to need to consider your overall financial picture. You don’t want all your money invested in your house, especially if you’re close to retirement and need income, or you are receiving the house as your part of a divorce settlement.

If the mortgage amount keeps you up at night and makes you feel anxious, then paying it off trumps any other number crunching.

What if you suddenly have enough money to buy the house of your dreams? This may be at the top of your wish list, but consider more than the initial purchase price. A house also costs you ongoing taxes, insurance, general upkeep and maintenance.

Make sure it makes financial and psychological sense in your circumstances.

Paying off someone else’s debt

If someone in your life has dug themselves into a financial hole by unwise spending, poor financial choices, or a sloppy employment history, think carefully. The idea that we can solve someone’s problems is enticing. However, you should consider the other person’s behaviour and whether paying off their debt would only open the door to new spending.

Maybe you’re thinking about buying your kids a house or paying off their mortgage or school loans. Of course, you love your child, but you have to know your kids and make some judgement calls about the effect such a gift might have on their motivation in life and their relationships.

On the other hand, helping a hard-working child, investing in their business, or starting an education fund for your grandchildren may be exactly what you’d like to do.

Changes to other plans

Any change in financial circumstances is going to require a new look or revaluation of any goals you had before the change.

Early retirement

Can you take that job and shove it? It really depends on the size of your windfall, your age, your current portfolio, and your spending needs.

If your large windfall becomes known at work it can make it very uncomfortable for you to continue in your present job but it may be a mistake to think about ditching work for good.

You have to realize that to maintain your lifestyle, the money might not last. If you aren’t generating income because you stopped working, your investments may not keep up with inflation or your spending habits.

However, this could be a terrific time to consider retraining, upgrading your education, or taking a sabbatical to explore a new career.

Final thoughts

Don’t expect your windfall to magically turn your life around, but whatever you do will impact your financial life and your goals.

Balancing today’s wants with tomorrow’s needs takes a little thought and some planning. You want to view this sudden lump sum as seed money to sustain and grow your wealth.

You don’t want to blow it and end up back where you were, or worse.


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