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What Should You Do with an Unexpected Windfall?

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Money Growing up, my husband knew someone who received more than $1 million from a settlement related to a work injury. Thinking that they had more money than they could possibly spend, they bought a bigger house, and more than one nice car. And the spending continued. A couple years later, the money was gone, and the guy was struggling to make ends meet, since the injury had left him unable to practice his primary skill.

Many of us dream about receiving an unexpected windfall. What would you do if you discovered that a long-lost relative had bequeathed a million dollars to you? What if you actually won the PowerBall? What if you just received a better Christmas bonus than you expected?

The idea of receiving a windfall is a powerful one. Suddenly, it seems as though you have the chance to improve your financial fortune in one fell swoop. It’s also tempting to rush off and by a huge house and a flashy car. You have to be careful, though. You might be surprised at how fast you can go through money – even when it seems like you can’t possibly run out.

Take a Step Back

Your first move should be to take a deep breath, and then step back from the spending precipice. Take a look at your options, and consider your goals and financial priorities. Does your windfall really change what you want to have happen for the future?

Think about what you want to use the money for, and figure out how it can really benefit you and your family. Think about how it can help you reach your goals. And, if it is a rather large windfall, you might want to hold off on spending the money until you can consult with a knowledgeable and trustworthy financial professional. Try not to make decisions about how to use the money until you have an actual plan in place.

Set Yourself Up

In many cases, a windfall isn’t going to be enough to warrant you immediately quitting your job. Instead, set yourself up for the future with the windfall. Consider setting up income investments, and taking a “boring” route to the future. Think about your long-term goals, and use your windfall to help you reach those goals.

Once you have your plan in place, whether it’s to pay off all your debt and invest in a solid index fund, while providing what your kids need for college, or whether it’s planning for the retirement of your dreams, decide on a plan. Once that plan is working on your behalf for a better financial situation, you can look at your short-term goals.

Have a Little Fun

In many cases, it’s possible to factor in a little fun when it comes to your windfall. While you might want to buy a nicer home, there is rarely a need for a McMansion (especially since there are regular costs to keeping up a large house). But you could also enjoy an extra perk, such as a family vacation, or some other one-time lifestyle bonus. But be careful – opting for lifestyle inflation could be a real problem down the road as your windfall diminishes.

What would you do with a windfall?

(Photo: Tax Credits)

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5 Responses to “What Should You Do with an Unexpected Windfall?”

  1. Megan E. says:

    I think about this often – depending on the amount though, it wouldn’t necessarily change my life much.

    If I got $2.2 million or more, then I could live off the investments. If I got $1 million, as in the story above, I’d invest it all (minus maybe $5k for a vacation). At 6% return, I’d make $60k a year – taking out half that amount (to protect against inflation) and being taxed 10-15% on that would yield around $25k (on the high tax end). That would be used to get me debt free (pay off the house for 4 years, then buy a new car in year 5, buy a new car in year 6 for DH) and then after 6 years, I could start putting that into a separate investment fund a for a new house down the road.

    In other words, I’m frugal regardless of what I have in the bank!

  2. Agreed with Megan. Although I would set aside 10% for charity (one form or another) and I would invest the rest in preference shares which yield 7-8% these days. We have no debt other than a cheap mortgage which costs less than what we’d get with those investments, so we’d not pay off the mortgage.

    And we’ll travel. Canal barge trip in France is first on the menu. :)

  3. I’m on the same page as William. I’d give 10% to charity and then invest the rest in income generating investments (preferred stocks, real-estate, etc).

    A trip to France sounds awesome, but I may just live there 6 months and then 6 months somewhere else, and so on & so forth. (Fiji anyone?)

  4. Lei Lani says:

    I had a small, unexpected ‘windfall’ from when my mother passed away. All she had was her house, which my brother and I had helped her keep the mortgage payments current on while she was alive. My brother and I talked, and he decided he wanted to keep the house as rental property. I, on the other hand, did not want to deal with rental property that was 3 hours away. We agreed he would re-finance mom’s mortgage to pay off her existing mortgage, and but out my half of the equity. I took the money (less than $70K) and:
    1. paid off all of my credit cards. (yay!!)
    2. opened a Roth IRA
    3. fixed my roof
    4. set aside some in my emergency fund (now funded for 18 months of no income, finally!!)
    5. set aside $5K for other home improvements
    and finally
    6. had A LOT of fun with less than $1,000,

  5. Kris says:

    The first thing I would do is get professional advice. At a time when you get a lot of money you didn’t expect, you need someone who can help advise you, without the emotion I would be feeling. And with expertise on the different options. But I’d definitely keep some for “play money” :)


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