What to Do When You Receive a Financial Windfall

What to Do When You Receive a Financial Windfall

Receiving a financial windfall, whether it comes from an inheritance, the sale of a business, a bonus, or something else, can be a great opportunity. At the same time, receiving a large amount of money at once can make it difficult to know where to start. There can be a lot of different options, and it can be tempting to make big decisions right away. Instead, take some time to understand your options and think about how the money fits into your overall financial plan. Here are a few areas to consider when deciding what to do with a windfall.

Pay Off High-Interest Debt

One of the first things to look at is any high-interest debt you have, especially credit card debt. Paying off high-interest debt can be one of the best uses of a windfall because it immediately eliminates future interest costs and can free up money in your monthly budget. Student loans are another area to consider. Whether paying them off makes sense will depend on the interest rate, loan terms, and your overall financial situation. The same is true for a mortgage. If you have a higher mortgage rate or are getting closer to retirement, paying down or paying off the mortgage could make sense. However, it is important to look at the bigger picture before putting a large portion of your windfall toward any debt.

Invest the Money

After addressing any high-interest debt, investing some or all of the remaining money may be a good option. A windfall can significantly change your financial picture, so it is worth taking a look at your current portfolio and making sure the new money fits with your existing investment strategy. Rather than putting a large amount of money into one investment, a diversified portfolio can help spread out risk. Your investment strategy should also reflect what the money is ultimately for. Someone saving for a home in the next few years will likely have a different strategy than someone investing money they do not expect to use for 20 years. It can also be tempting to invest in whatever has performed well recently, but your goals, time horizon, and risk tolerance should be the main factors driving your investment decisions.

Consider Charitable Giving

If giving to charity is important to you, a financial windfall can be a great opportunity to make a larger contribution to organizations or causes you care about.There are also different ways to approach charitable giving, and some strategies may provide tax benefits. For example, donating appreciated investments instead of cash may allow you to support a charity while potentially avoiding capital gains on the investment.The best strategy will depend on your individual situation, so it can be helpful to discuss charitable giving with your financial advisor and tax professional before making a large contribution.

Review Your Estate Plan

A significant change in your wealth is also a good reason to revisit your estate plan. This is especially important if the windfall came from an inheritance or if you now have substantially more assets than you did when your estate documents were originally created. Depending on your situation, a trust may be useful for protecting assets from potential creditors or a future divorce and for helping determine how assets will eventually pass to your children or other family members. Estate planning can get complicated quickly, so it is important to work with an estate planning attorney who can help determine what strategies make sense for your specific circumstances.

Strengthen Your Financial Foundation

Not every dollar from a windfall needs to be invested or used to pay off debt. It can also be a good opportunity to strengthen your financial foundation. This could mean increasing your emergency fund, putting more money toward retirement, or setting aside money for future goals such as buying a home or paying for education. It may also be tempting to immediately increase your spending or make a large purchase. There is nothing wrong with enjoying some of the money, but taking care of your longer-term goals first can help you get much more value from the windfall over time.

Take Your Time

Most importantly, remember that you do not have to make every decision right away. Receiving a large amount of money can be exciting, and making major financial decisions in the moment may not always lead to the best outcome. Give yourself some time to understand what you have, what you want the money to accomplish, and what your different options are. Working with your financial advisor, tax professional, and estate planning attorney can help you make decisions that work together rather than looking at each decision individually. A financial windfall can have a meaningful impact on your financial future. Taking the time to make a plan before making major decisions can help you use the money in a way that supports both your current priorities and your long-term goals.

Schedule a complimentary consultation with our team to learn how personalized financial planning can help you make the most of a financial windfall.