Have you ever discovered $20 in a coat or pants you haven’t worn in a while? It’s one of life’s most pleasant surprises. You now have money you didn’t expect and can do any number of things with it.
Now consider the feeling of euphoria that comes with a financial windfall of four, five, six, or seven digits or more.
A financial windfall is any sudden, usually unexpected, influx of money well beyond your normal budget. Windfalls are usually one-time occurrences.
Large windfalls are common fodder for fictional stories, but they happen fairly often in real life.
Examples of potentially substantial financial windfalls include:
- Collecting on a loved one’s life insurance policy.
- Winning a lottery — whether it’s the jackpot or a secondary prize.
- Winning on a game show or other contest.
- Winning a casino jackpot.
- Winning a crazy sports bet, such as a golf fan who recently turned $8 into nearly $1 million betting on the Ryder Cup.
- Signing your first professional contract as an athlete or entertainer.
- Inheriting a fortune from a recently deceased family member.
- Discovering a family heirloom is a priceless antique.
- Writing a novel and earning a six-figure book deal.
- Selling the Apple stock you bought in the 1980s or the Amazon shares you purchased in the 1990s.
- Winning a lawsuit or settlement for a large judgment.
- Discovering oil or other minerals on your property.
- Becoming a social media influencer.
- Selling an invention or startup company.
Windfalls can occur on a smaller scale as well. These would include a bonus from your job or a large tax refund. Any amount of money you didn’t count on that can help you do something you couldn’t do without the money can be considered a windfall.
People who reap a financial windfall often have little to no experience with great wealth. Therefore, before you spend too much of your windfall, it’s important to take care of your current obligations and make a plan for how best to spend what’s left.
Below are a few considerations on how best to ensure you spend a windfall wisely.
Pay your taxes first
In most situations, the IRS will want its share of your financial windfall. The larger the windfall, the higher your tax bill. There will almost surely be federal income taxes to pay, as well as state income taxes if you live in a state that taxes regular income. If your windfall resulted from the sale of stock or property, you will have capital gains taxes to pay.
Covering your tax bill is the most important priority after a windfall. Failing to pay taxes can result in the costliest penalties, including imprisonment.
Pay off debt second
An unexpected windfall is a perfect opportunity to get rid of debt, especially credit cards, student loans, medical bills, and car loans. Getting your debt down to zero is like getting a fresh start financially. You have fewer obligations each month. Plus, the money you dedicated to monthly debt payments can go toward an emergency fund or long-term savings.
[ Related read: How much money should you have in your emergency fund? ]
Make a plan for the rest
Once you’ve covered the first two areas, your next logical course of action is to make a plan for what to do with the remainder of your windfall.
It’s foolish to think that scoring a financial windfall means the end to budgeting and financial planning. Plenty of millionaires and even billionaires have lost their fortunes due to materialism, carelessness, and bad decisions. This occurs more often when riches were achieved through a financial windfall, such as a lottery jackpot.
Avoid the emotional temptation to spend lavishly upon getting a windfall. Stash the money in a savings account, CD, or another safe haven. Then set some goals on what you wish to achieve with your newfound wealth.
Making a plan doesn’t mean you can’t have fun with your wealth. But it can mean less of a financial hangover when you do decide to splurge on a new car, home, or dream vacation.
Get professional help
While getting a lot of money can alleviate some stress, it can create other types of anxiety. Large amounts of money are difficult to manage, especially if you have little experience doing so.
The larger your windfall, the more you should enlist the help of legal and financial professionals. You should consider talking to professional(s) with experience with investments, taxes, and overall financial planning.
In some cases, a windfall may require legal help as well. You may want to set up a trust or a foundation to give some of your money away. Wealth will also affect your estate plan, which will require both financial and legal help. A lawyer can also help you protect your windfall against people who may want to take advantage of your newfound wealth.
Prepare for long-term needs
A windfall is also a great opportunity to shore up your financial future. The plan you create should include expenses that may arise in the future, including:
- Caring for aging parents
- Education expenses for children and/or grandchildren
- Your own medical and long-term care needs as you age
- Retirement savings
Learn to say no
If and when it becomes public knowledge that you suddenly have considerable wealth, you may be bombarded with requests. “Friends” and family members — many of whom you haven’t seen in years — may appear out of nowhere with all kinds of appeals for cash. You’ll be asked for “loans,” for investment capital in a relative’s business idea, and for help covering other people’s debts and obligations.
Just because you have money now doesn’t obligate you to pay for your third cousin’s second wedding or to invest in your brother-in-law’s dream of owning a sports bar.
One of the areas your windfall financial plan should include is how much you want to give to charity, which may or may not include relatives. Decide the types of causes you want to support. Once you have settled on who to give to and how much to give, stick with the plan and politely tell others you can’t help them.
A financial windfall can be a dream come true. But it can just as easily turn into a nightmare if you mismanage your unexpected wealth. Prioritize ways to shore up your financial future, create and stick to a financial plan, then you can better enjoy the material benefits that financial windfalls can offer.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.