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Theoretically, receiving a sudden windfall should alleviate your financial worries. Who wouldn’t enjoy becoming richer overnight?
However, managing a significant amount of money can be overwhelming, especially if the windfall is linked to something negative. For example, I received a life insurance payout after my father’s passing in 2013, and the money carried both emotional weight and stress, leaving me fearful of making any mistakes.
If you find yourself with a windfall, it’s crucial to take your time and make thoughtful decisions about how to use that money. Here’s how you can navigate this process.
Pause Before Making Decisions
No matter the source of your newfound wealth, it likely comes with strong emotions. Emotions and rational decision-making can conflict, so it’s wise to take a moment to reflect before making financial choices.
If your windfall resulted from a negative event, like a family member’s death, a settled lawsuit, or the sale of a cherished business, your emotions may influence how you view that money. I felt the need to distance myself from my father’s insurance money because it was a constant reminder of my loss.
Even if your windfall has positive associations, such as winnings from a casino or a surprise bonus, those good feelings might tempt you to make hasty decisions. Allowing some time to pass will help you assess the situation more objectively, leading to better choices.
So, how long should you wait before deciding? For sizable windfalls, consider postponing any decisions for six months or even longer. This break will help you process your emotions and prepare for important decisions. (See also: Don’t Make These 6 Dumb Mistakes With Your Financial Windfall)
Secure Your Funds
What you do with your money while you contemplate your options depends on the nature of the windfall. Life insurance and inheritance funds can often remain in the original account and may even accrue interest, providing you with emotional space without the pressure to make immediate choices.
In cases like lottery winnings or inherited retirement accounts, you might have the option of receiving either a lump sum or annual payments. Choosing annual payments can allow for manageable decisions over several years instead of feeling overwhelmed by numerous large choices.
If you must take all your windfall at once, consider placing it in a money market account or a high-yield savings account to keep it safe. (See also: Interest Rates Are Rising: Here’s Where to Keep Your Cash)
Consult a Tax Professional
The tax implications of your windfall can significantly influence how you utilize it. Some sources, like life insurance payouts, may come tax-free, but many forms of windfalls will be taxable, impacting your financial decisions.
For instance, if you won a significant amount at the blackjack table, the IRS considers it regular income, potentially placing you in a higher tax bracket with your newfound $40,000. Failing to account for this increase could lead to a rude awakening come tax season. A CPA can assist you in navigating the complexities of this increased income, possibly advising you to maximize your tax-deferred retirement contributions.
If you sold a business, inherited taxable property, or received a considerable work bonus, a tax expert can provide guidance on the most tax-efficient ways to manage and enjoy your new wealth without an unpleasant tax burden. (See also: 14 Reasons Why an Accountant Is Worth the Money)
Organize Your Finances
Before splurging, assess your current financial position to see how your windfall can enhance it.
If you’re grappling with high-interest or revolving debt, using your windfall to pay it off (or at least reduce it) may not seem glamorous. Yet, diminishing this financial burden can grant you peace of mind and greater financial freedom. It can feel like receiving mini windfalls every month when you no longer have to allocate most of your paycheck to debt repayment.
Similarly, if retirement savings haven’t been a priority, your windfall presents a fantastic opportunity to secure a better financial future. Make the most of this year’s 401(k) or IRA contributions to enjoy tax benefits and set the stage for increased retirement savings in the years to come.
Finally, retain some of your windfall as an emergency fund. Being prepared for unexpected financial challenges is a significant benefit for your future self.
Enjoy Yourself
Receiving a substantial sum of money is inherently gratifying, and indulging in some fun is a legitimate way to celebrate it.
Regardless of the source of your windfall, splurging on something you wouldn’t typically consider can be a fulfilling way to embrace your good fortune. Allocating a portion of your money for personal enjoyment is a rewarding way to acknowledge the occasion.
