How To Plan For A Windfall

Finances are an emotional topic, especially when the nature of how wealth came to you is unexpected, like receiving an inheritance. You likely dream of winning the lottery, but do you know what to do from a financial planning perspective...

Finances are an emotional topic, especially when the nature of how wealth came to you is unexpected, like receiving an inheritance. You likely dream of winning the lottery, but do you know what to do from a financial planning perspective if your numbers are called? 

There are specific considerations when receiving a large amount of money that go beyond daydreaming of how you’ll spend it. Whether it’s truly winning the lottery (however unlikely), receiving a stock award, or even getting a higher-than-expected bonus, becoming wealthy overnight is no walk in the park! Today we’ll cover five things you need to consider in case of an equity windfall.

What Is A Windfall?

A windfall is any significant, unexpected monetary gain from something out of your control. A windfall could come from:

  • Receiving a large lump sum of cash (like the lottery)
  • Stock vesting
  • Receiving a large bonus
  • Sign on bonus
  • Inheritance

No matter where they come from, windfalls have one thing in common; they’re unexpected. The best thing you can do to prepare for an unexpected financial situation is to plan!

#1 – Prepare Emotionally

If your windfall results from a loved one passing away, take time to grieve and sort through your emotion before worrying about specific financial plans. There’s a phenomenon called “inheritors guilt,” which describes the emotions of receiving an inheritance. You might feel as if being excited about your inheritance and the opportunities it brings with it is inappropriate. 

The point at which this feeling dissipates is different for everyone. But it’s important to know that it’s okay to take time to grieve your loved one before deciding what to do with your inheritance.

#2 – Clarify Your Goals and Values

It’s easy to get swept up in the excitement a sudden influx of wealth brings. But before you write that check to charity, pay off your mortgage, or plan a family vacation, you must return to your values and goals. 

What short and long-term financial goals can this wealth be put towards? For example, if one of your short-term goals is to pay off your vehicle, you could use a portion of your inheritance to achieve that goal. Or, if you have a long-term goal of retiring early, the funds can be dispersed to your retirement savings vehicles.

#3 – Make A Plan

Put your money to work! Think of yourself as the boss, and you get to determine what job your windfall gets to do. 

Use your goals and values to help decide the “job” best suited for your money. Do you need support in the investing department? Retirement savings? Debt repayment? The choice is yours!

#4 – Save For A Rainy Day!

Part of a holistic financial plan is avoiding a scarcity mindset and enjoying your life TODAY! 

A scarcity mindset is feeling like you lack time, money, relationships, etc. You might be stuck in this mindset if you feel like you have bills and responsibilities piling up, are spreading yourself too thin, or saying yes to opportunities that aren’t a good fit for you or your schedule because you’re worried that another won’t come. 

All of this being said, don’t be afraid to budget a portion of your windfall toward expenses that are exciting and meaningful to you. Money is meant to be enjoyed, so take that family vacation, or splurge on that kitchen renovation to support your growing family. 

If you don’t permit yourself to spend money, you will likely lose sight of your goals. A scarcity mindset can be a self-fulfilling prophecy because the beliefs are so strong that they make it difficult to move forward. Don’t get stuck in that cycle!

#5 – Have A Tax Game Plan

We can’t forget about taxes! And, unfortunately, windfalls often come with tax complications.

First, start by determining where the windfall is coming from. For example, a settlement from a court case will be treated differently in the eyes of the IRS than someone who wins the lottery.

If it’s an inheritance, what exactly are you inheriting? Cash and property aren’t taxable, but any earnings you gain on an inherited account or property sale may be taxed. 

If your windfall is from a bonus, taxes should automatically be withheld, but your bonus could be taxed at a higher rate than your typical income. 

When in doubt, it’s always best to work with your financial advisor and accountant to determine your tax liability.

Windfalls are unexpected, but unexpected doesn’t have to mean unprepared. Planning is always best for finances, and your financial advisor is your ally.

 If you’re preparing for the unexpected, have questions about creating goals, or determining your values, please contact our team today. We look forward to the opportunity to work with you!