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What to do with an unexpected windfall of money

Have you thought about what you might do if you received an unexpected windfall money, say from lottery winnings?  Most of us are not likely to win the Powerball but it is very likely that many of us will receive bonuses, inheritances or even large tax refunds.  Making smart decisions when this happens can change your financial future positively.
What is the biggest mistake that people make when in situations like this?
The overwhelmingly biggest issue is that people view this money as “mad” money.  They weren’t expecting it so they don’t feel compelled to have a plan for what they are going to do with it and just spend it all.  Even if they have the winning lottery ticket for a huge jackpot this can be a problem.
Are the considerations for winning the lottery different than receiving another type of windfall like a bonus or inheritance?
They are not really as different as one might think they would be.  The main difference is just that all of the consequences are greatly intensified when winning the lottery versus receiving a large bonus or inheritance.  Perhaps the biggest difference is that lottery winners tend to have more opportunities to give money to friends.
What is one of the most important considerations in these situations?
First and foremost is the tax implications which are different for each type of windfall that you might experience. Winnings, inheritances and bonuses for example will be subject to different tax rates and different types of taxes depending upon one’s unique financial situation.
What is the most important step someone should take when coming into unexpected money?
Gather a team of professionals to help you determine all of your options. This team might include a tax accountant, a financial planner and perhaps even attorney. You want to find people who know the laws and have the ability to help you develop a smart financial plan.
Do we have to save or pay down debts with all the money?
No, there is almost always the ability to have fun with some of the money. The important consideration is that the “fun” money is an appropriate percentage of the total. It is just critical that one understands all of the consequences, you wouldn’t want to end up in worse financial shape than you were before getting the unexpected windfall of money.
What would you suggest to someone who wins or otherwise comes into a lot of money?
First, know the tax impact and save that percentage to pay the taxes when they are due. Next, save at least 20% of the remaining for your retirement.  Other options could be paying down debts.  Sometimes, there is even enough to pay off many of your debts which will increase your monthly cash flow.  And of course another option is saving for college expenses if those are looming.
Can we then freely spend the rest or should we do something else?
It might be best to talk with your advisor team to determine the best options for the remaining funds, which can include spending an appropriate amount of the funds as “fun” money. Any good plan will include that element. As long as it is in moderation and not so greatly different than what you would have done without the infusion of cash you will be on sound financial footing.

Posted: 1/14/2016 with 0 comments

Categories: Financial, Money, Money Matters

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