Effective ways to manage an unexpected windfall.
Key takeaways:
- Taking time to step back and reflect before using your windfall helps prevent any emotional or impulsive financial decisions.
- Organize your windfall into categories for savings, investments and expenses to assist your short-term and long-term financial goals.
- Windfalls could be subject to taxes; understand how to calculate what you owe to avoid surprises.
Sometimes life surprises us in big ways — like with receiving unexpected money. Whether it’s from an inheritance, work bonus, legal settlement or lottery win, a financial boon can feel both exciting and overwhelming. Although it will probably be tempting to spend it quickly, conscious planning can help you make the most of your windfall and create long-lasting financial security.
What is a financial windfall?
A financial windfall refers to any sudden and substantial influx of money that is outside of your usual income.
There are various sources of windfalls — such as a large tax refund, lottery win, inheritance, or a sale of a home or business.
It is crucial to thoughtfully and strategically plan how you will manage these funds to ensure long-term benefit rather than short-term gratification.
Steps to take when you receive a windfall.
First things first; Pause. Before making any purchases or decisions, allow yourself some time to think through your options and resist any emotional spending. The Financial Industry Regulatory Authority notes that “beneficiaries might find that they have an urge to splurge, are unsure how to invest their assets, or are targeted by fraudsters — any of which can lead to a money blunder.” Taking time, about 6-12 months, to cool off allows you to thoughtfully choose where to place your funds. You may want to put your money in a safe account such as a certificate of deposit or a high-yield savings account. This provides you the space to weigh your options intentionally and seek professional advice.
Create a financial plan.
Designing a solid financial plan is crucial. Begin by defining your goals, both short and long-term. Do you have debt to pay off? Are you saving for a home? Do you want to build an emergency fund? You can break your windfall into categories to help you make the most of it:
- Savings: Build or add to your emergency fund.
- Investments: Build your long-term wealth through your investments. A Commerce Banker can help you make a plan to do this.
- Expenses: Designate money for your expenses or important purchases.
Allocating your funds into categories will ensure that your windfall will continue to serve you in your future.
Understanding tax implications.
Windfalls are typically not tax-free. Depending on where your influx came from, you may owe federal and state taxes. You need to know how different types of income are taxed so you can plan and avoid any unexpected liabilities. A helpful tool to calculate any taxes that might need to be withheld can be found on the IRS webpage opens in a new window.
Final thoughts.
A financial windfall can be an outstanding opportunity to improve your future if handled properly. Take your time, seek advice, and focus on your long-term goal rather than going for quick wins. By using the right strategy, your windfall can be a stepping stone to financial freedom.
Utilize trusted financial resources.
You do not have to navigate this journey alone. Here at Commerce Bank, we have a variety of tools and resources created to help you make informed decisions. Reach out to us today — we are here to guide you every step of the way.
