Do’s and Don’ts When Receiving a Windfall

Receiving a windfall can be an exciting and emotional time, whether it's an inheritance, a lawsuit settlement, or winning the lottery. However, the sudden increase in wealth can be overwhelming, leading many to make poor financial decisions that ultimately lead to financial ruin. According to studies, more than one-third of lottery winners end up in bankruptcy within 3 to 5 years of winning. Therefore, it is crucial to take a disciplined and focused approach when managing a windfall. Here are some do’s and don’ts to help you make smart financial decisions.

Do: Take a Breath

Receiving a windfall can be an emotional time, especially if it's due to the loss of a loved one. It's natural to have your judgment clouded by emotions, so take some time to grieve and allow your senses and feelings to settle before making any major financial decisions. Avoid making any impulsive decisions that could have long-term consequences. Excitement is another emotion that can affect your judgment, so allow yourself to come down from the excitement of a large windfall.

Do: Pay Off Revolving Debt

Paying off revolving debt, such as credit cards, should be one of your top priorities. While it may not be the most fun way to spend your windfall, paying off credit cards can have the most significant impact on your financial future. It can free up more money for other financial goals and improve your credit score, making it easier to obtain credit in the future.

Do: Invest a Portion into Your Current Financial Goals

Investing a portion of your windfall into your current financial goals is an excellent way to achieve them faster. Whether it's saving for a down payment on a house, funding your retirement, or starting a business, a windfall can give you the boost you need to achieve those goals sooner.

Do: Create an Irrevocable Trust If You Can’t Trust Yourself

Money affects people in different ways. If you're bad at controlling your spending and accumulating debt, then more money will only amplify those behaviors, leading to financial and psychological problems. In that case, creating an irrevocable trust can be an excellent way to manage your windfall. A trust will allow someone else to help you make the best decisions with your inheritance, ensuring that it is used wisely and for your benefit.

Do: Enjoy It

If you receive an inheritance, the purpose of that money is to improve your life. While paying off debt and funding financial goals is a wise option, set aside a portion for enjoyment. Go on a trip, upgrade your appliances, or even upgrade your housing if you need more space. However, make sure you have enough cash to cover future costs associated with your new toy.

Don’t: Spend It Before You Receive It

Many heirs assume they will receive a large sum of money and start spending it by using debt for large purchases. They end up being surprised when they don’t receive as much as assumed or receive nothing at all. Therefore, it's crucial to avoid making any financial commitments until you have the money in your account.

Don’t: Ignore Taxes

If you receive a deferred-tax account such as an IRA, you could pay taxes and a penalty depending on your age. This could push you into a higher tax bracket, making you pay more in capital gains taxes and/or force you to pay IRMAA on your Medicare if you're receiving it. Therefore, it's essential to consider the tax implications of your windfall before making any financial decisions.

Don’t: Make a Large Purchase

While it may be tempting to splurge on a high-priced item with your windfall, it's important to exercise caution when making large purchases. While the initial cost may be significant, high-ticket items often come with ongoing maintenance and upkeep costs that can add up over time. This can lead to a situation where you end up spending more than you bargained for, and potentially even putting yourself in a difficult financial situation down the line. Therefore, it's important to carefully consider the ongoing costs associated with any major purchase before making a decision, and ensure that you have the means to cover these costs in the long term.

Conclusion

Overall, receiving a windfall can be an incredible opportunity to improve your financial situation, but it's important to approach it with caution and responsibility. Taking the time to consider your options and seeking advice from professionals can help you make the best decisions for your future. Remember to pay off debt, invest in your financial goals, and set aside some money for enjoyment, but also avoid overspending, ignoring taxes, and going into further debt.

By following these simple do's and don'ts, you can avoid becoming one of the many people who lose their sudden wealth just as quickly as they received it. Instead, you can use your windfall to build a strong financial foundation for yourself and your loved ones, creating a legacy that lasts long after the money is gone.

Fiduciary Mission

At Integritas Financial(IF), we are committed to providing fee-only, fiduciary financial planning services that are tailored to the unique needs of young professionals, particularly millennials. IF works with you to develop customized financial plans that address key areas such as estate planning, trusts and wills, retirement, workplace benefits, education funding, student debt, and buying a house.

IF believes in transparent, client-focused service that puts your financial goals at the center of everything we do. As a fiduciary firm, IF is dedicated to acting in your best interests, and we never sell products that charge commissions to clients.

IF’s goal is to help you achieve a stable and prosperous financial future by providing comprehensive financial planning services that are tailored to your individual needs. Whether you're just starting out in your career or you're already well-established, IF can help you navigate the complexities of financial planning and create a roadmap for success.

Ryan@if-money.com

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