I’m sure you had a dream of suddenly receiving a huge windfall at one point or another. Receiving an inheritance, writing a best-selling book, or winning the lottery are all ideas that capture our imaginations. The problem, though, is that many of use aren’t ready to have that type of cash drop on us. The result, especially in a fit of initial exuberance, can be to run through the windfall too quickly and end up back at square one.
Before You Spend Money, Take a Step Back
While it’s tempting to rush out and buy a new car — or even a new house — it’s better if you take a step back and re-evaluate your situation. The same is true when it comes to deciding where to invest your windfall. Even smart moves, like investing, can turn into nightmares if you aren’t properly prepared.
Instead of making decisions quickly, put your money in a low-risk, interest-bearing account (or several if you are worried about FDIC protection). Let the money sit there for a few weeks while you think about the situation and consider your financial priorities. What do you want your money to accomplish? What are you looking for right now? Consider the following:
- Financial security
- Future growth
- Having fun
- Helping others
- Estate planning
Look at these items and figure out what is most important to you. If financial security is at the top of your priority list, then you can use your windfall to pay off debt, and establish some sort of income portfolio that an benefit you over time. You can also set up foundations and give to charity, as well as put together the essentials of your estate plan. In many cases, you can use your windfall to do a little of everything. First, though, decide what is most important, and tackle that first.
Recognize the Realities of Taxes
So many people get excited about the advertised dollar amount like that $1 million dollar lottery check, and immediately plan for how to use that amount. However, you will likely need to pay taxes on your windfall and thus you aren’t going to net $1 million. With any windfall, you likely can’t count on the entire amount of money that you receive to be part of your plans. A tax professional can help you get an estimate of how much you will owe in taxes so that you can begin planning for that. Subtract out taxes from your equation and make plans based on your after-tax money. Strategies like donations and retirement account contributions can reduce your tax liability, but you do need to be ready for that aspect. It’s better to over-estimate what you owe in taxes, though, because it’s better to be pleasantly surprised than to owe more than you expected.
Get Help with Your Planning
Once you know what you want your money to accomplish, and how much you are likely to have after taxes, it’s time to start making decisions with your money. Get help with your planning. It’s okay to pay financial planners, lawyers, and other knowledgeable and trustworthy professionals to help you get squared away. Figure out what investments will be of most benefit to you, and get help with estate planning, and with vehicles that can help you protect your wealth. Get the help you need, and you will be more likely to succeed in the long run, rather than squandering your windfall.
So, how will you spend your windfall? And what would you do with $1 million dollars?.