What To Do With Your Windfall

March 18, 2021

Stock options, inheritance, selling your business, legal settlement or simple luck may all give you the temptation to blow the budget. Everything you dreamed of having can all of a sudden become a reality for you. However, if you want to make the most of it, you need a plan. Before you buy that Ferrari, it is important to consider a few things regarding your recent windfall.

Think For Yourself

Pay yourself first. Whether you feel that you earned it or not, it is yours. Those privy to your situation may have all sorts of ideas regarding what you should do, but the first thing to look after is yourself.

Think about your needs:

  • Do you have consumer debt?
  • Is your emergency funds adequate?
  • Do you have deferred maintenance on your home?
  • What is needed in your immediate family?

Next, think about your mid-term and long-term goals:

  • Can this windfall accelerate these goals?
  • Is furthering your education important to you?
  • Is taking sometime for yourself important to recharge, mourn your loss, or reflect on what is next for you?

Then, think through what you want to do with the money:

  • Do you want that new car?
  • Do you want a house?
  • Is it time for a vacation?
  • Is there a charitable donation that is important to you?

Figure out specifically what is best for you before making any decisions. Indecision is a normal part of this process so do not do anything you are not comfortable with.  We typically advise clients to take a minimum of 3-6 months to work through this process before acting on any decision. One thing to think about when you come into a large amount of money is "how long at your current income level would it take you to save that same amount of money?" This allows you to think about the windfall in the terms of your time.

Time Horizon

Are you short-term or long-term focused? You could quit your job and live life lavish for a year or you could invest it all in conservative retirement funds. Most likely, you are somewhere in between. As financial advisors, we recommend you set a portion aside for reasons such as emergencies, family, and retirement. At the same time, we believe that all work and no play leads to nothing. It is up to you to find the appropriate balance of how much you want to spend now and how much you want to save.

What Are The Options?

Once you know what you want and when, you should create a plan. While this sounds straightforward, there can actually be many different strategies to achieve your goals. Let’s say you want to buy a new car and also fund your retirement. Do you pay cash or finance? How does this purchase affect your retirement funds? What ways can you minimize taxes? What investments do you want? What could change in the future that would affect this decision? In the end, speaking with a financial planner will help answer these questions for you. An experienced planner will be able to project out multiple scenarios and help you decide among the best options for your circumstances.