Manage Windfalls Wisely

Manage Windfalls Wisely

Manage Windfalls Wisely

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Daniel Morris

May 29, 2015

Although the odds of winning the lottery may be stacked against you, there’s a chance you’ll receive a large -- perhaps unexpected -- financial windfall at some point during your life. Regardless of how it arrives -- inheritance, insurance payout, divorce settlement, retirement-plan distribution, sale of a business or company stock options -- careful money management is critical to enjoying the money for years to come. 

Unfortunately, many windfall recipients fail to use their newfound wealth wisely and are left with little or no savings -- and lots of regret. To avoid joining their ranks, there are a number of important considerations to keep in mind when receiving large cash payouts.

Avoid Sudden Impulses

Most windfalls are squandered during the first days, weeks and months as recipients make impulsive decisions to quit their jobs, take exotic vacations, or buy a new house or car. For this reason, the best course of action is often to leave the entire sum in a money-market account for the first six months. This requires a great deal of discipline, but you’ll avoid making irrational decisions and will give yourself time to evaluate your options and develop a solid long-term plan.

Many people mistakenly believe that a large sum of money is the answer to all of their problems. In fact it often creates new anxiety and stress. By explaining your options and creating a plan, a qualified financial advisor can help manage a windfall.

Invest for Long-Term Gains

While using a portion of the windfall to reduce debt and pay bills is often a good idea, investing a significant sum for your future is also recommended when suitable. The windfall’s potential for appreciation can be significantly increased through long-term investments in both stocks and bonds. Keep in mind, though, that investing money carries risk as well. In many cases, investing a windfall can be a difficult decision, but it’s important to remember that, factoring in inflation, cash that is not invested could be losing purchasing power.

Upon hearing about your windfall, friends and relatives may come forward offering financial advice. While they may have your best interests at heart, their advice might not help you achieve your financial goals. Before you make any investment decision, it’s important to review your existing holdings, expected expenses, employment security, risk tolerance, taxes and time horizon before retirement. A professional Financial Advisor can help you evaluate these variables and craft a long-term plan to help you achieve your goals.

One strategy a Financial Advisor might recommend -- to avoid investing the entire sum during unfavorable market conditions -- is dollar-cost averaging, or investing a predetermined sum of money on a regular basis. Such a program does not guarantee a profit or protect against loss in declining markets. It involves continual investments, so you should also evaluate your ability to continue purchases through low price levels. But it can help even out the market’s peaks and troughs; it can also help you resist the urge to time the market -- something even professional investors seldom do well for any length of time.

Manage Taxes

A large financial windfall will quickly educate any unsuspecting recipient about the tax strings attached. To determine how much to set aside for taxes, check with a tax advisor or accountant. The sooner you can calculate tax implications, the easier it will be to plan for the future. Since the windfall may push you into a higher tax bracket, it’s also a good idea to discuss what steps can be taken to manage taxes in the coming years. 

How you spend, save and invest your financial windfall will determine whether it helps you achieve your financial goals or leaves you with regret. To learn more about effectively managing an inheritance, insurance payout, divorce settlement, retirement-plan distribution, sale of business or company stock options, contact your Financial Advisor.

For 20+ years Dan has been working with individuals, families, and business owners to help plan their financial futures, protect and grow their current assets, create an income stream when needed, and do it as tax efficiently as possible.  

Daniel Morris 

Financial Advisor at Wells Fargo Advisors, LLC 



J. Philip Faranda Headshot
Phone: 914-450-8883
Dated: June 4th 2015
Views: 1,019
About J. Philip: J. Philip Faranda is broker and owner of J. Philip Real Estate in Briarcliff Manor, NY, which he fou...

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