Have you thought about what you might do if you received an unexpected windfall money, say from lottery winnings? Even though it is highly unlikely anyone of us will have lottery winnings, it is likely that many of us will receive unexpected bonuses, inheritances or large tax refunds.
What is the biggest mistake that people make in these situations?
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. Surprisingly, whether it's lottery winnings or large inheritances, a majority of the people spend most of the money in ways that don’t improve their financial situation.
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. And when you have to pay the taxes might be different as well.
What would you suggest to someone who wins or otherwise comes into a lot of money?
Talk to a financial advisor or someone else who will look at for your best interest. You need to develop a plan for how you will utilize this new found wealth to improve your financial situation. This plan should include money towards retirement, paying down debt and even college funding if those are your primary priorities.
Should we 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.
Are there any other ways people can avoid mistakes with large windfalls of money?
The best practice is to double down on essential money habits especially during the first 12 months so you don’t fall into bad habits. This means being even more deliberate with spending or giving away any funds, following a spending plan and putting even more towards retirement. Your budget may increase but you need to still have all of the important categories in that budget.