What Should You Do With A Windfall?

Have you received an inheritance? Are you a lucky lottery winner? Maybe you gained a sizeable amount from the sale of property or a business, or received severance pay?

Do you know what to do with your windfall?

There are many reports of fortunes squandered by people dipping too quickly or liberally into their windfalls. Whether it’s $25,000 or $25 million, the key to holding onto wealth is planning.

1. Park it somewhere safe

Once the initial excitement has worn off, give yourself a few weeks or months to start thinking about the possibilities.

Related: So you’ve received a windfall: Now what?

Set the money aside into a place not used for your day-to-day transactions. Seeing a large sum of money every time you check your bank balance makes you much more likely to want to spend it.

Temporarily place it in a high interest savings account or short-term GIC.

Give yourself some time to get your emotions under control and to adjust to your new financial circumstances. This enables you to make better decisions about the purchases and expenditures that are important to you in the long term.

2. Put off big financial decisions

You’ll likely want to pay down, or eliminate, your debts immediately, but major financial decisions are best put off for a while.

There are so many possibilities – trips, cars, clothes, jewelry, electronics and other toys, furthering your education, donations to charities, and helping out your relatives and friends.

Think about whether it’s prudent to quit your day job or sell your house to build a dream home on a tropical island.

Related: Dreaming of a lottery win

The larger the amount received, the longer you should take to think about it.

3. Splurge a little

Celebrate by spending some cash doing something fun. Maybe allocate 2 – 10% to a dream purchase or a trip depending on your situation and the size of the windfall.

Surprise your family and friends with your generosity, but don’t make casual promises ahead of time.

4. Invest carefully

Integrate newfound wealth into your existing portfolio planning and develop a spending plan.

A windfall can help you build a more solid financial base or provide the backbone of a retirement plan.

Newfound wealth can also tempt people to take more investment risks. Don’t automatically assume your risk tolerance has increased substantially because you have money you can “afford to lose.”

A good investment plan will prevent people from burning through their capital faster than they realize.

5. Assemble your financial team

You may need the services of:

  • A financial planner
  • Investment manager experienced with high net-worth clients
  • Accountant or tax specialist
  • Estate lawyer

Don’t give up complete control to your investment manager, however.

And, watch out for investment schemes and shady financial advisers.

Final thoughts

How to manage a windfall sounds like the kind of problem we’d all like to have, but money changes a lot of things.

Many view windfalls as “found” money and treat it differently than money they’ve earned. You want to avoid the pitfalls. Sudden wealth can be innocently squandered and it’s often way less than it originally feels.

Related: Why we are secretive about our money

And, it’s not just about the money. Social circles may change. People may come out of the woodwork looking for a handout; children and other relatives may demand money. Friends will be eager to help you spend.

Make sure your “once in a lifetime opportunity” actually lasts a lifetime.

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  1. Tracey H on May 27, 2015 at 5:24 am

    I’ve always treated windfalls as savings for retirement. The only exception was when we were well on our way to retiring early and inherited a few thousand from my grandfather and used it for a trip to Disney World. I figured it was a once-in-a-lifetime trip for the whole family. Wouldn’t you know it? I won a better trip there 2 years later! I don’t regret having spent that money (that time), but now all bonuses, inheritances, etc. just become part of our retirement plan (and the latest inheritance–from my parents–will allow a much earlier retirement than previously planned).

  2. Kindra Casey on May 27, 2015 at 2:25 pm

    We won a $2,000,000 Lotto 649 Jackpot in 1994. We simply put $1,500,000 in 30 year Canada coupon bonds and $500,000 in 30 year Canada strip bonds.

    We are getting $129,000 a year in actual interest and our strip bonds mature worth $5,941,071 which compound interest is $5,441,071 or $181,369 annually averaged out.

    They were both invested at 8.6% Canada long bond yields. We can’t believe how low rates are now.

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