6 steps to handle a sudden financial windfall
Knowing what to pay off and how much to save can be harder than you think
Few people would turn down a financial windfall, whether via an inheritance, lottery winnings or an unexpected bonus. But while a cash infusion may be welcome, it can also raise questions about the most effective ways to use it, particularly if you have credit card debt to pay off and other financial goals to reach.
"When people get a windfall, usually there are multiple demands for that money," says Susan Bradley, author of "Sudden Money: Managing a Financial Windfall." While the size of the inheritance determines how many goals you can satisfy, the following steps can help you ensure that your money goes the furthest, whether you've received an additional $10,000, $50,000 or millions of dollars from a lottery jackpot.
Step No. 1: Take a pause.
An unexpected cash infusion "can feel like it's infinite and will always be there," Bradley says. In fact, many people commit to spending three or four times the amount because they think they have more money than they actually do, Bradley says. To avoid spending impulsively, don't make any decisions that can't be unmade.
"You really want to think carefully about this," says Mike Sullivan, spokesman for Take Charge America, a nonprofit credit counseling agency. "Take a few days to get advice and think about what your best course of action will be." If you act too quickly on your own impulses, you risk falling into financial trouble despite your recent windfall.
"Most people already have pre-established financial attitudes -- spenders, savers, gamblers, etc. -- and that attitude probably isn't going to change with a few extra thousand dollars or more," Sullivan adds. "Have a good honest talk with yourself and maybe with a counselor who understands."
If you feel especially overwhelmed, hire a financial planner to help you prioritize your goals and a certified public accountant to help you handle the tax implications. Also, create a prioritized list of your financial concerns "because depending upon how much money you received, there might not be enough money to solve all your problems," says Zaneilia A. Harris, president of Harris and Harris Wealth Management Group in Upper Marlboro, Maryland.
You'll know you're ready to make financial decisions when you stop changing your mind about whether you'll invest the money, go on a cruise or start a business, Bradley says. "If you're going back and forth, it just means you're not ready yet."
Step No. 2: Emergencies first.
While there are likely multiple ways you can improve your financial situation, emergency situations take precedence. For example, "if you don't have a dime in savings and you're behind on the mortgage, take care of that first," says Mike LeClear, vice president of Consumer Credit Counseling Service of Northeastern Indiana.
Lottery winner Richard Lustig poured his entire windfall into financial emergencies that had just cropped up when he won $10,000 two decades ago. The seven-time lottery winner, who wrote, "Learn How to Increase Your Chances of Winning the Lottery," had been recently saddled with a leaky roof and medical bills after his son was born. "I didn't have to think twice. All my money went to the hospital bills and the roof," he says.
Step No. 3: Cash is king.
Once emergencies are handled, your strategy will differ based on the amount of the windfall. For some this may mean seriously padding a savings account.
"Whenever you have extra money you should save as much as possible," Sullivan says. "The only thing that takes priority over paying down debt is saving -- it should always come first."
Tucking away three to six months of living expenses into a savings account, just in case of emergencies, is a good rule of thumb. But the more you can save, the better.
Step No. 4: Prioritize debt.
Credit card debt and other loans that are weighing you down should be your next priority.
"Always pay down the debt with the highest interest rates first," Sullivan says. "And that's usually credit card debt. Pay that down before you tackle mortgage or student loan debt. That will improve your cash flow the most."
For example, a card with a high balance likely carries a high minimum payment. By paying that debt off, you free up the largest amount of money to go toward other financial goals.
Step No. 5: Safeguard the future.
Once your emergency savings and monthly cashflow issues are addressed, it's time to look to the future. "This is when you focus on your long-term objectives," such as saving for retirement or taking care of a child's education, says Harris.
This is also the time when you consider financial gifts and charitable donations. Designate an amount you can afford and be willing to say "no" to requests that exceed what's allotted. "You create a giving plan so you can make the money go the furthest," Bradley says.
Step No. 6: Do something fun.
While it's important to further your financial goals, once you've addressed your top financial priorities, take a portion of the money and enjoy yourself. Doing so makes it less likely that you'll splurge impulsively or squander all of the money. When Lustig scored a $842,000 lottery win, he paid off all of his credit card debt and loans, invested a little -- and then bought a Harley-Davidson. "When you get that kind of money, you also have to have fun," he says.
Just don't have too much fun.
"There is nothing evil about buying yourself something or going on vacation, but I think you have to be thoughtful about it," Sullivan says. "When I read about lottery winners who quit their jobs and quickly buy all these things, I have to shake my head because odds are, with no income, they are going to be in serious trouble in four or five years."
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