Tips for Managing a Financial Windfall
Many people dream of striking it rich with a sudden financial windfall that could drastically change their fortunes. Winning the lottery or unexpectedly inheriting a multimillion-dollar estate will remain a fantasy for most, but a greater number of individuals will see themselves benefit from some sort of financial payout in their lifetime.
This is especially true when considering that increased generational wealth is expected to be passed down over the coming decades in what’s often referred to as the “great wealth transfer.” As Baby Boomers—currently the holders of the most wealth in the country, by far, and the second largest population group by generation—prepare to transfer their assets to younger generations, it pays to start thinking about the implications of a potential inheritance. A financial windfall might seem like an uncomplicated blessing, but found money of any size requires thoughtful management to maximize its full potential.
Whatever the circumstances that give rise to a source of newfound wealth, it’s important to make sound financial decisions. Beneficiaries might find that they have an urge to splurge, are unsure how to invest their assets, or are targeted by fraudsters—any of which can lead to a money blunder.
Here are steps you can take if you come into a sizable sum of money.
1. Create a plan.
You might be tempted to quit your job or make a major purchase, but those might not be wise decisions if you don’t fully understand the limits of your new wealth.
Consider holding off on making any big moves with your newly acquired money over the first six to 12 months. During this period, you might want to place cash assets in a relatively safe place with a bank or credit union, such as a certificate of deposit or savings account. If this amount is significant, you might want to split it between different products so you don’t exceed federal insurance coverage.
To increase your financial security, it’s important to think of a financial windfall as a long-term asset rather than a short-term splurge. Giving yourself a cooling off period can help you prioritize how to better secure your financial well-being over the years to come.
2. Get organized.
Use this time to get a handle on your current financial situation: Gather your personal financial documents, including monthly bills, bank statements, brokerage firm statements, credit card bills and loan documents.
While suddenly finding yourself with a sizable amount of money might alleviate stress over bills and debt, it’s helpful to know your monthly expenses so you can better manage, preserve and invest your wealth over the long term.
Next, make sure you have a grasp of your monthly cash flow. Assess what you have, what you owe, the type of payment coming to you and any other income you have to cover your daily expenses.
When completing this exercise, it’s important to understand how much money you’ll actually receive from the windfall. The initial figure might say “$1 million,” but after taxes and fees, you’re likely to end up with far less.
3. Take care of financial essentials.
The phrase “put your money to work” doesn’t apply only to investing. Sometimes, the best thing to do with found money is to start paying off debt.
The balances on credit cards and personal loans with high interest rates can grow quickly if you aren’t able to pay them off every month, especially if you’re making only the minimum payments. Even what might seem like a relatively small charge at the time can take years to repay. If you use your new funds to erase your debt, you can save or invest the money you would have been paying in interest.
You might also want to create an emergency fund if you don’t have one, or bolster your savings if you do. A sudden windfall doesn’t mean you’re immune from financial emergencies, and such a fund can provide a valuable cushion should you find yourself in financial trouble.
4. Invest in your future.
Make a list of your financial goals and estimate how much each will cost. Want to go on your dream vacation? Earn a degree? Buy a house? Save for a child’s education? Write it all down. Make sure you don’t forget about something that might seem obvious to include, like your retirement.
Separate your goals into categories—short, medium and long term—and consider setting up savings and investment accounts for each one. It’s easy to think you’re saving enough money, but keeping separate accounts allows you to keep track of exactly how close you are to achieving each goal.
If your company has a 401(k) or other retirement savings plan, contribute at least enough to get the company match if one is available. There are also other options available to invest for retirement if you don’t have access to an employer-sponsored plan.
If you want to share some of your wealth with loved ones, there are many options available depending on your goals, from establishing a college savings account or a trust to designating them as beneficiaries on your own accounts. And should you want to donate some of your investments to charity, you can set up separate accounts for that purpose as well.
5. Seek advice from the pros.
Making decisions about an investment strategy isn’t always easy or intuitive, particularly if you’ve never done it before. Consider hiring a registered financial professional, as well as an accountant, insurance agent or financial planner, to help you manage your windfall, understand any potential tax implications and advance your financial goals. Learn more about the various types of professionals you might want to consider working with.
If you’ve inherited a brokerage account, be sure to check out the firm’s website for guidance on next steps. If a financial professional is assigned to the account, they should be able to help you understand the investment holdings and if they’re appropriate for you. They can also explain any restrictions or fees that might apply for selling inherited assets and the expected capital gains or losses for securities you might choose to sell. In addition, a financial professional can advise if any inherited retirement accounts are subject to required minimum distributions (RMDs), when the requirements take effect and how to calculate your RMD.
Keep in mind that you don’t need to keep inherited accounts with the original owner’s brokerage firm should you decide another firm is a better fit.
Before choosing a financial professional or firm, check out FINRA’s BrokerCheck or the Securities and Exchange Commission’s Investment Advisor Public Disclosure database to learn about their background and disciplinary history. You might also want to check with your state securities regulator.
6. Protect your money from scammers.
A windfall—particularly one that others can find out about, such as a lottery win or some inheritances—can make you a target for fraudsters, so keep your guard up.
In addition to researching professionals and potential investments, you should brush up on the different types of fraud, including emerging scams such as those tied to artificial intelligence or cryptocurrency. And be aware of the many variations of imposter investment scams. In many of these schemes, bad actors misuse the names of real registered financial professionals or firms to create the appearance of legitimacy.
It’s a good idea to become familiar with the common tactics that fraudsters use and learn the warning signs of a scam. Red flags include promises of quick profits, “guaranteed” returns, secret strategies or pressure to invest right away. FINRA’s Scam Meter can help you determine if an investment or pitch might be fraudulent. Learn more about how to protect your money.
