What to Do with a Windfall
Nov 30, 2023
An unexpected influx of cash could come from a variety of sources such as a work bonus, an inheritance, a property sale, a legal settlement, or even the lottery. If you come into a windfall, it can be exciting to think about what you can do with the extra money. But it’s important to take your time and be smart when deciding what to do next.
Get Your Finances in Order
Although it can be tempting to splurge on a dream purchase, make sure you have a solid financial foundation first. Consult with a financial advisor to help you develop a plan based on your financial goals, risk tolerance, and the size of your windfall.
- Pay Down Debt: If you have debt, consider paying it down. Start with high-interest debts such as credit cards. If you have a mortgage, you could make an extra payment toward your principal to reduce the length of your mortgage.
- Build an Emergency Fund: Put aside three to six months’ worth of living expenses in an emergency fund to help you weather a storm such as a health issue or job loss.
- Invest: Consider investing some of the extra money so it will continue to grow and pay dividends into the future. Talk with a financial professional for help determining a diverse mix of investments that will help you achieve your long-term goals.
Prepare for Taxes
Windfalls from different sources might be treated differently from a tax perspective. Consult with a tax professional to understand the tax implications of your situation.
- Withholding Adjustments: Your windfall may mean you owe more in taxes. Consider adjusting your regular withholding to help compensate for your anticipated tax bill.
- Tax-Efficient Investments: Some investments such as IRAs, 401(k)s, 529 education savings plans, and health savings accounts have tax advantages. Consider investing in some of these types of accounts to reduce your tax load in the short term.
- Treasury Bonds: Certain bonds such as I and Series EE bonds are relatively safe interest-bearing investments. Rates are periodically adjusted, so make sure they’re favorable before you invest.
Share the Wealth
If you have a more sizeable windfall, you might wish to share your good fortune with others. Consider some of these gifting strategies.
- Gifts for Loved Ones: Individuals can receive cash gifts up to a certain amount ($17,000 in 2023) without needing to pay taxes on them.
- Charitable Donations: If you donate a portion of your windfall, you’re not only doing good, but you may also be able to deduct part or all of your gift.
- Estate Planning: Consider updating your will or creating a trust to protect your assets for future generations.
Most importantly, take time to consider your next steps. Discuss your situation with a trusted professional before making hasty decisions or broadcasting your good fortune. If you’ve come into some extra unexpected cash and would like help determining the best strategy, please schedule a consultation with one of our financial professionals.
