Imagine this: You’ve just inherited a large sum of money from a distant relative. Or, better yet, you’ve just won the Powerball.
Sounds like a dream come true, right?
Though receiving an unexpected influx of cash is certainly a blessing, significant financial windfalls do necessitate some management. If you’re in the fortunate position of inheriting or receiving a large sum of money, consider these tips for managing your newfound funds.
1. Understand your new assets.
Whether you’ve received an inheritance, a winning lottery ticket, property, or some other unexpected asset, your windfall will come with its own set of rules, regulations, and terms. For example, an inheritance might carry with it specific terms for how the gift must be used. Property, life insurance, businesses and retirement plan assets each come with their own set of tax and legal considerations, too. Take time to read the fine print associated with your new assets and research the potential issues or concerns you might experience alongside your new wealth.
2. Seek the support of a financial advisor.
As positive as a financial windfall might be, it can also be overwhelming. For someone whose pre-existing assets were minimal, or for someone with little investing experience, a windfall can be even more daunting. Thankfully, you don’t have to navigate these new waters alone. Financial consultants have a wealth of experience guiding clients through these matters. The right financial advisor can help you understand the terms and taxes associated with your windfall and can help you determine the best way to manage, save and invest your assets moving forward. No two advisors are alike, so take time to learn about which type of financial advisor best suits your needs and find the right advisor for you.
"As positive as a financial windfall might be, it can also be overwhelming."
3. Pay off debt.
For better or worse, many people shoulder significant amounts of debt in adulthood. According to the Federal Reserve Bank of New York, total household debt in the United States reached a new peak of $12.73 trillion in the first quarter of 2017, exceeding its previous peak of $ in the third quarter of $12.68 trillion in 2008. Student loans account for more than ten percent of that debt, while housing accounts for more than 71 percent.1 Whether you’re paying off student loans, a car loan, credit card debt, or a mortgage, consider dedicating a portion of your financial windfall to settling some debts. Take time to consider the interest rates and terms of your outstanding debt obligations to determine which debts, if any, you’d like to pay off.
4. Build an emergency fund.
An emergency fund typically consists of your essential living expenses. Many financial consultants suggest having three to twelve months of savings set aside in an emergency fund. For many of us, day-to-day living expenses and the occasional splurge can stall progress toward building a long-term emergency fund. But, emergency funds can prove invaluable. If something unexpected occurs (like the loss of a job), your emergency fund can help you weather the storm.
5. Increase your savings and retirement funds.
It’s never too early (or too late) to think about how you’d like to retire and how much money you’ll need to secure the retirement you want. An unexpected financial windfall might help boost long-term savings and retirement funds or add new non-cash assets to support your life in retirement. Talk to your financial advisor about how best to leverage your new funds or assets to support your retirement planning goals.
6. Treat yourself (a little).
If you’ve just received a large influx of money, your friends and family might caution you, “Don’t spend it all in one place!” Of course, this advice holds true. At the same time, though, you might have enough of a financial windfall to purchase a few things that were previously out of reach. Don’t go on a spending spree. But, consider whether you might be able to treat yourself to one or two items on your long-standing wish list. You might find that a small splurge will help you avoid the urge to squander a larger sum over time.
7. Don’t quit your day job.
Unless you’ve suddenly received hundreds of millions of dollars, most likely, your new funds won’t cover your expenses for the rest of your life. Don’t let the temptation of new wealth distract you from your day-to-day. Continue to cultivate your career and strive to do your best professionally. If an unfortunate market downturn or a family emergency curtails your assets down the line, you can take comfort in a steady monthly paycheck.
8. Invest in financial knowledge.
Beyond the boon to your portfolio, financial windfalls offer an invaluable educational opportunity. Through the process of learning about your new funds and assets, through conversations with potential financial advisors, and through the day-to-day management of your new wealth, you will have many opportunities to grow your financial knowledge. I encourage you to take it one step further. Devote time to reading about saving and investing. Peruse blogs, forums, and websites focused on financial topics. Engage in dialogue with your friends and family. Ultimately, your new wealth may not only open the doors of financial opportunity; it may also open the doors to a lifetime of learning.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.