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 $100,000.

 6 steps to handle a sudden financial windfall

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, take some time out before making any financial decisions. "Usually people don't see the full range of what's possible at the very beginning of a windfall event," says Bradley. 

If the amount seems large to you, hire a financial planner to help you prioritize your goals and a certified public accountant to help you handle the tax implications, suggests Zaneilia A. Harris, president of Harris and Harris Wealth Management Group in Upper Marlboro, Md. 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," Harris says.

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 18 years 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. While clearing up credit card debt is definitely a smart move, "if it's going to take all of that windfall to pay it off, I wouldn't recommend that," says LeClear. You can't get out of debt if you don't save money because inevitably the car will break down or some other unexpected expense will have you reaching for the cards again, LeClear says.

Instead, take a portion of the windfall to put toward an emergency fund. While many financial experts suggest having three to six months of savings, if you've amassed a lot of credit card debt, LeClear suggests making that about one month of savings before focusing on those bills.

Step No. 4: Prioritize debt

Credit card debt and other loans that are weighing you down should be your next priority. Not only should you first consider credit cards that have the highest interest rates, but you should also look to eliminate loans that have the greatest impact on your monthly cash flow, Harris says.

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, LeClear says. 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.

See related: Best ways to spend a $25,000 windfall, Odds are, you're better off retiring debt with a windfall, 7 simple ways to create an emergency savings fund

Published: May 16, 2011

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Updated: 09-02-2015

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