Many people daydream about what they would do if they received a big inheritance or won the lottery. But did you know that about 70% of those who receive a financial windfall won’t have any of that money for more than a few years? A windfall is often a once-in-a-lifetime opportunity, so you’ll want to make the right decisions about what to do with it. Here are a few key do’s and don’ts.
Do Give Yourself Time
Resist the urge to start spending immediately. Instead, wait between 6 months and a year to make any major decisions (although you should certainly pay off any overdue debt balances immediately and consider paying down all high-interest rates debts, as we discuss below). In the meantime, store the money in a safe, short-term investment, like a Treasury bill, money market account or certificate of deposit.
Don’t Go It Alone
When deciding what to do with the money, turn to experts who can give you knowledgeable, objective advice. You may receive a lot of suggestions from family and friends, but you’re better off working with professionals like CPAs, attorneys or investment advisers, depending on your situation. Interview several people to determine who best suit your needs.
Don’t Get Scammed
If an investment opportunity seems too good to be true, get second opinions from additional experts to verify that it’s really a good deal. Be particularly suspicious if anyone guarantees a certain payout or rate of return, or if you’re pressured to invest immediately. Although you’ll want to share news of your good fortune, it’s probably a good idea to keep quiet about it as much as possible, so you don’t become a target for scammers and aren’t flooded with requests for loans or financial assistance.
Do Tackle Debts First
With any spare cash you have, your top priority typically should be to reduce or eliminate outstanding high-interest rate debt. Let’s say you have $2,000 in outstanding credit card debt with an 18% interest rate and you’re making $80 monthly payments. At this rate, it will take you just over eight years to pay off this balance and, with interest, you will pay the credit card company a total of nearly $3,100 over time. You will save yourself hundreds, and maybe thousands, of dollars in interest if you pay off debt as soon as possible instead.
Don’t Forget Taxes
Whether you win a cash prize or a new car, you will likely have to pay tax on the value of what you receive. Factor that tax payment into your plans so you’re not taken by surprise later. And if you plan to leave or receive a large inheritance, contact your CPA for estate planning advice that can minimize your estate tax bill.
Don’t Overdo Generosity
It’s natural to want to help family and friends, but don’t give away more than you intend. Before you start spending your money, decide how much you’d like to set aside to use for gifts or loans (or investments in relatives’ business ideas). Put that money in a separate account, and when it’s gone, stop giving or lending. You’ll feel less stressed and create fewer hard feelings if the decision is out of your hands.
Do Invest in Your Dreams
A large amount of cash can make a big difference in your life, so make the most of it. That means thinking about your long-term goals. Put retirement funding at the top of your list, then brainstorm about the long- and short-term objectives that are most important to you and decide how much of your money you’d like to devote to each one. That includes deciding how you’ll make the money grow and last so that you can enjoy it for many years to come. This long-term approach can help you avoid spending some or all of your fortune now and better position you for a prosperous future.
Do Think Small
We’ve been talking about big windfalls so far, but this same advice applies if you get a raise or an unexpected tax refund. No matter what size of bonus you get, thoughtful planning and discipline will enhance your enjoyment of it.