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What Should You Do with an Unexpected Windfall?

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 [3]. 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 [4])