Most of us dream of receiving an unexpected windfall, in hope that it would allow us more financial freedom in our lives, whether to pay off our debts or to indulge in a life of luxury. But whether it’s a family inheritance, a sizeable work bonus or a major lottery win, an unexpected windfall is not a guarantee for an easy life in the absence of proper planning and investing.
It is estimated that approximately 70% of people who receive a vast sum of money unexpectedly will squander it in only a few years, according to non-profit National Endowment for Financial Education. Lottery winners are the best example, with many cautionary tales of squandered wealth making the headlines in recent years.
If you are lucky enough to receive an unexpected windfall and aren’t sure how to handle it, check out these 11 useful tips from Forbes Finance Council members to help make your newly acquired wealth last.
1. Don't Do Anything (Initially)
With a flood of wealth, it can be tempting to have irrational spending patterns and make illogical decisions. That's why it's valuable to take a breather and do nothing when you first get a windfall. After you've had a pause, you'll realize that many of those rash choices aren't the best way to make your wealth last. Then you can make a smart long-term plan, either by yourself or with an adviser. - Elle Kaplan, LexION Capital
2. Pay Off Debt First
While it is often human nature to want to "blow" through a windfall, it is good advice to take all, or at least most of it, and pay off debt first. Paying off debt is like getting an instant return on your money -- the higher the debt, the higher the equivalent return. After debt is paid down, consider using some of the windfall to supplement your emergency fund. - Jacob Alphin, Rillhurst Capital
3. Understand Time Horizon, Risk And Tax Efficiency
Understand your time horizon. If you know when you might need this money in the future, you can start to format how much risk you may or may not be comfortable taking. Also look to invest in the most tax-efficient matter. Can you use the windfall to contribute to a Roth or traditional IRA? - Lance Scott, Bay Harbor Wealth Management
4. Give 10% Of It Away
When you give away 10% of your money, it results in the following.
1. Better budgeting: You start with 10% less, and so you immediately start budgeting,
2. Freedom from materialism: You just proved to yourself that money and the things that money can buy aren't that important.
3. Increased happiness: According to social scientists, giving brings more happiness than receiving. - Jason Lee, DailyPay
5. Invest, Pay Down Debt, Or Hold In Cash
The first question to ask is whether to invest, pay down debt, or hold it in cash. Debt should be non-existent, low cost or tax-efficient -- otherwise, pay it off. Then put money in an emergency fund of three to six months' income. Once you've got those two covered, consider your investment goals, time horizon, taxation, and liquidity needs to determine the right investment vehicle and strategy. - Paul Ewing, Prosperity Advisory Group
6. Examine Your Financials
First, make sure you have an emergency fund of three to six months' expenses in the bank. Then look at debts like credit cards, cars, student loans, etc., and knock them out. People forget or don't realize that paying off debt equals investing. While it's not a direct investment, you'll see gains in your cash flow, therefore increasing net worth. If there's any left, invest. Max out your retirement accounts. - Justin Goodbread, Heritage Investors
7. Have A Plan And Stay The Course
Investing a windfall will depend on the nature of it. If the windfall is called such due to the fact that it was merely unexpected, it should be invested per the current plan. If we are considering it a windfall because of how large it is, it may be time to consider changing the plan, perhaps to assume additional risk in the portfolio. Either way, invest according to a plan. - Rob Gabridge, Tarfis Wealth Management
8. Save It, Pay Your Debts Or Invest
Before investing that windfall, it's important to assess if:
1. you have sufficient cash savings in an emergency account.
2. paying off debt makes sense, and if the added cash inflow improves your financial condition.
If you have these two covered, you are in a stronger position to think about investing into accounts such as your IRA, 401(k), 529, brokerage account and so on. - Amir Eyal, Mylestone Plans LLC
9. Re-assess Your Risk Tolerance
When deciding how to invest an unexpected windfall, you should first consider if this windfall changes your investment goals or risk tolerance. By meeting with a financial adviser, you can determine your personal and professional goals and how you would like this new money to work for you. You can then re-assess your risk tolerance accordingly. - Stacy Francis, Francis Financial, Inc.
10. Pay Yourself First
While there's always room for fun, make the most out of your tax refund or bonus by examining your financial house first. Review any tax implications from your newfound windfall, consider things like maxing out your workplace retirement plan, such as a 401(k), pay down debt, or add to your children's college funds. Once you've prioritized your needs, set some money aside to reward your hard work. - Gregory Ostrowski, Scarborough Capital Management
11. Try The 50/50 Plan
Take 50%, and put it towards something you want guilt-free. Reward yourself. Take the remaining 50% and put it towards debt and savings. If you have no debt, then put it towards investments and savings. - Ismael Wrixen, FE International