How to Deal with a Financial Windfall

Written By Jeff Hindenach
Last updated November 25, 2019

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May 28, 2015

Simple. Thrifty. Living.

In the course of a lifetime, many people experience an unexpected financial windfall at least once. The source might be an inheritance or life insurance payout, the proceeds from selling a small business, a lawsuit settlement or even lottery winnings. Wherever this chunk of money comes from, it’s easy to consider it as belonging to an entirely different category than the paychecks you earn. While you should certainly allow yourself to have a bit of fun with unexpected cash, it’s also important to use this one-time wealth in a way that will permanently improve your life.

Before committing to spending decisions, you’ll need a clear idea of how large a bite the IRS will take from your newfound wealth. While life insurance payouts are usually tax-free, inheritances that include business assets or retirement accounts can bring tax complications that you must understand before taking any action. A short appointment with a tax specialist will help you learn about your specific situation so that you can move forward with the wisest choices. In many cases, it’s a good idea to put your anticipated tax payment into a CD until taxes are due.

If you don’t already have a “rainy day fund,” this simple emergency protection measure should be your first priority. Depending on the size of your windfall, set aside anywhere from $1,000 for emergency car repairs to six months of living expenses. Many people spend years living from one paycheck to the next, and establishing a safety net now will provide you with ongoing peace of mind.

Paying down mortgage or credit card debt may not seem like the most exciting way to spend unexpected wealth, but you can think of it in terms of buying a stronger future. Not only will paying down your debt reduce the interest you’ll pay over the coming years — thus permanently increasing your available spending money — but reducing your debt load will also cause your credit score to rise. This in turn will give you lower interest rates on a future car or house, thus leveraging your financial windfall far into the future. Here are some tips on how to pay off your credit card debt.

If your employer matches your retirement plan contributions and you’re not already paying in the maximum amount, it’s great to use some of your windfall for this purpose. After all, what other investment provides a 50 percent to 100 percent return? While you can’t directly deposit a large chunk of money into such a fund, you can increase the amount withheld from each paycheck and then make up the difference each month by using some of your windfall money. You can also open your own IRA to help put away even more money for retirement.

Needless to say, in addition to all the prudent moves listed above, you should also use some of the money for crucial aspects of life that fall outside the normal realm of financial planning: contribute to causes you believe in so that you help to make the world a better place. Put time and thought into the complex challenge of helping struggling family members or friends — not an easy task sometimes! A financial windfall provides you with the opportunity to give serious thought to your future and a chance to do what is most important to you in life.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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