In a world where financial windfalls are often deemed a stroke of luck, many individuals find themselves facing unexpected challenges when managing newfound wealth. Whether it’s an inheritance, a legal settlement, or the sale of a house, the excitement of a financial windfall can sometimes cloud judgment, leading to decisions that may have negative long-term repercussions. If you find yourself on the receiving end of a large sum of money for whatever reason, consider taking the following steps:
1. Set the funds aside for a few months
Though you may be anxious to put your new wealth to work, the best first step after receiving a windfall is often to do nothing at all. This is especially important if the windfall substantially changes your net worth. It may take a while to get comfortable with your new situation.
2. Seek professional advice
When you’re ready, be sure to enlist the help of experienced professionals in the fields where you need it. Many windfall recipients believe they can handle their newfound wealth without assistance – only to discover later that they’ve made mistakes. Seeking advice early on from certified financial planners, tax pros, and registered investment advisors can provide valuable insights tailored to your specific circumstances, ensuring a secure financial future.
3. Determine the tax consequences
As Benjamin Franklin famously said, “Nothing is certain except death and taxes.” If you come into a substantial sum of money, it’s important to understand the potential tax consequences before making any big (and often irrevocable) decisions.
A tax pro can help you determine your potential tax liability. In addition, they can often recommend strategies to minimize the taxes you will owe.
4. Check your emergency fund
No matter what your net worth is, it’s important to have cash set aside for unexpected expenses and potential setbacks. Tying your wealth up in investments and illiquid assets can create difficulties if you need cash quickly.
Though most personal finance experts recommend having six months of living expenses in emergency savings, this is a broad rule of thumb. Consult with a certified financial planner to determine how much savings makes sense for you.
5. Eliminate high-interest debt
Once you’ve taken a look at the tax consequences and your emergency fund, you can focus on setting financial goals and developing a plan. Oftentimes, a prudent first step is to eliminate any high-interest debt.
If you have so-called “bad debt” like credit card or other high-interest loans, paying it off sooner rather than later can reduce financial stress and save you money over time. Additionally, if you have student loans you’ve been carrying for a while, now may be a good time to pay those off once and for all.
Having too much debt can create a variety of financial challenges. However, that doesn’t mean you need to eliminate all debt. For example, if you’ve locked in a low interest rate on your mortgage, you may want to focus on other financial priorities before paying off your home.
6. Update your estate plan
A windfall should prompt a re-assessment of your existing estate plan. Failing to update or create an estate plan can result in unintended consequences for your heirs and beneficiaries. Work with an estate planning attorney to ensure your wishes are clearly documented, and your assets are distributed according to your preferences, safeguarding your legacy.
7. Invest in accordance with your goals
Start by creating a list of goals that require money to achieve. For example, do you have young children you’d like to send to college? Do you want to stop working altogether or buy your dream vacation home?
Then, work with an investment advisor to develop an investment plan that helps you accomplish these goals without taking on unnecessary risk. This approach may not be nearly as exciting as investing in a friend’s startup venture. However, you’re more likely to be able to preserve and grow your wealth by following a disciplined investment plan.
8. Treat yourself
Having a plan for your wealth is important. However, the money should also be enjoyed if possible. If there’s something you’ve always wanted to do but money has been an obstacle, now may be the time to make those dreams come true.
Perhaps you can finally take that exotic vacation you’ve been thinking about. Or maybe your dream car is now within reach. There’s nothing wrong with treating yourself. Just make sure you do so in moderation while keeping an eye on your long-term game plan.
Final thoughts
Receiving a windfall is a unique and potentially life-changing experience, but it comes with its own set of challenges. By taking a measured and thoughtful approach, windfall recipients can turn the money into a lasting financial legacy. Remember, financial success is not just about accumulating wealth; it’s about preserving and growing it for the benefit of yourself and future generations.
Originally published in the Aspen Times, November 30, 2023.
This column is general information, not individualized investment, tax or legal advice. Figures and rules were current when it was written and may have changed. Past performance does not guarantee future results, and all investing involves risk of loss.