There are a few broad categories that trigger people to reach out to me. <\/p>\n
Retirement planning is biggest. Major life changes (marriage, divorce, having kids) is a common reason, too.<\/p>\n
Another one, albeit slightly more unique: \u201cI <\/strong>have a good handle on our finances, but I want to get you involved because my spouse <\/strong>needs someone trustworthy. If I get hit by a bus, I want you already involved to fully take the reins.\u201d <\/em> <\/p>\n But somewhere in the Top 5 most common reasons is the rationale for today\u2019s article: <\/em><\/p>\n \u201cI received a BIG sum of money\u2026and I have no idea what to do next!\u201d<\/strong><\/em><\/p>\n<\/blockquote>\n Let\u2019s talk through the good ideas, bad ideas, and ugly pitfalls to avoid when it comes to receiving a windfall. <\/p>\n Your definition of a windfall will differ from mine. Some people consider $1000 to be a windfall. Others wouldn\u2019t flinch at receiving $100,000. It\u2019s in the eye of the beholder. <\/p>\n To me, a windfall fits one of these two loose definitions:<\/p>\n A windfall usually comes from one of the following sources: <\/p>\n Here\u2019s a common thought I hear during the financial planning process: <\/p>\n \u201cMy grandmother is 81, and my mom says Grandma has a lot of money. So, whenever Grandma dies, I\u2019m going to inherit a lot of it. Knowing that, I\u2019m pretty comfortable with my financial situation.\u201d <\/em><\/p>\n Brittany, who counts her chickens early <\/cite><\/p><\/blockquote>\n This thinking begs the question: is Brittany right to include her future inheritance as part of her financial plan? <\/strong><\/p>\n As with many financial planning topics, the best answer is, \u201cIt depends.\u201d<\/a> On one hand, overlooking a \u201csure thing\u201d inheritance would be terribly conservative<\/a>. But to include an inheritance that never materializes can torpedo your plan. <\/p>\n Going back to Brittany, here\u2019s what I\u2019d want to ensure to then confidently include an inheritance in her financial plan: <\/p>\n Too often, though, someone wants to include an inheritance in their financial plan despite them lacking any knowledge of what the inheritance will look like, or lacking the evidence as to whether they\u2019ll receive anything in the first place. That\u2019s a recipe for disaster. <\/p>\n In summary: if you know your future inheritance is a sure thing, go ahead and include it in your plan. Short of that \u201csure thing,\u201d I wouldn\u2019t count on it. <\/p>\n What should you do when your receive a windfall? The National Endowment for Financial Education<\/em> covers the topic pretty well:<\/p>\n Let\u2019s talk about that last bullet: does a windfall create scary tax implications?<\/p>\n Windfalls can come with tax scenarios that the average person simply hasn\u2019t encountered before. <\/p>\n You may need to file estimated taxes. There can be complexities surrounding distributions from retirement plans, inheritances, and lottery winnings. Exercising stock options is another tax tangle. <\/p>\n It makes sense to get help in this department. Typically, a CFP financial planner can point you in the right direction. Ultimately, a CPA accountant or other tax-preparer will help you file your taxes each year. <\/p>\n Remember: the US tax code is progressive, meaning that you\u2019ll pay a higher proportion of taxes as your income and net worth increases. Thus, after receiving a windfall, proper tax planning becomes more important for you than ever before. <\/p>\n How do people mess up their windfalls? Many different ways. <\/p>\n Sometimes, people are simply ignorant to what they ought to do \u2013 the classic \u201cI don\u2019t know what I don\u2019t know\u201d <\/em>scenario. Common reasons here include: <\/p>\n Other mistakes, of course, are \u201chands on\u201d acts. Common mistakes here include: <\/p>\n Receiving a windfall is a tremendous stroke of luck. Do not let one of these common pitfalls turn that luck on its head. <\/p>\n Here\u2019s how I\u2019d guide someone who just received an unexpected windfall. <\/p>\n First, I\u2019d consult the financial order of operations.<\/a> It\u2019s a simple, long-standing heuristic in the financial planning community that prioritizes an individual\u2019s financial needs. <\/p>\n It might suggest, for example, that our inheritor first creates an emergency fund and pays down some high interest debts, before then deciding to invest the remainder of their money toward their long-term goals. <\/p>\n But how should they invest? Well, that\u2019s a function of their financial plan<\/a>. If our inheritor doesn\u2019t have a financial plan, they need one. <\/p>\n Quite simply, a good financial plan should combine the various puzzle pieces in a person\u2019s financial ecosystem with their unique goals and values. A financial plan combines all the numbers with all the soft stuff. <\/p>\n Only after a cogent plan is in place can someone understand how they should be investing (let alone how they should be investing a large sum like a windfall). <\/p>\n I understand the desire to immediately spend a portion of a windfall on lifestyle upgrades or large self-indulgent purchases. But I\u2019d caution you against going overboard. <\/p>\n First, set a limit for yourself. Something like 5-10% of the windfall. <\/p>\n Second, ask yourself the important question: will this \u201cone-time large purchase\u201d actually lead to a longer outflow of on-going maintenance costs? Is it truly a one-time purchase, or is it forever lifestyle inflation?<\/p>\n A large windfall might beg a second set of important questions: what if you<\/strong> kick the bucket? <\/p>\n Check out our Estate Planning 101<\/a> primer for more details. <\/p>\n Do you want to \u201cpay it forward?\u201d<\/em> Good for you! It\u2019s probably better for the world than buying that decked-out pontoon boat. <\/p>\n Nevertheless, give wisely. It might be worthwhile to consult a philanthropic expert, an estate attorney, or an experienced financial planner to ensure that your gifts benefit your charitable causes and<\/em> do so while maintaining your best interests. <\/p>\n When you receive a windfall, careful planning and mindful decision-making can help you maximize its positive impact on your life. <\/p>\n There\u2019s no rush. Don\u2019t do anything stupid. Lean on trusted professionals to fill in your gaps in knowledge. <\/p>\n Thank you for reading! If you enjoyed this article, join 8500+ subscribers<\/strong><\/a> who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters<\/strong><\/a> before signing up. <\/p>\n -Jesse<\/p>\n Want to learn more about The Best Interest\u2019s<\/strong> back story?<\/em> Read here<\/a>. <\/p>\n\n
![\"\"](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/image-17-1024x371.png\")
<\/figure>\n<\/div>\nWhere Does a Windfall Come From? <\/h2>\n
\n
![\"woman](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-3755761.jpeg\")
<\/figure>\n<\/div>\n\n
![\"close](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-5550130.jpeg\")
<\/figure>\n<\/div>\nShould I Expect<\/em> a Future Windfall? <\/h2>\n
\n
![\"brown](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/egg-white-food-protein-162712.jpeg\")
<\/figure>\n<\/div>\n\n
![\"cube-six-gambling-play-37534.jpeg\"](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/cube-six-gambling-play-37534.jpeg\")
<\/figure>\n<\/div>\nImportant Stuff First<\/h2>\n
\n
Tax Implications<\/h2>\n
![\"calculator](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-4386373.jpeg\")
<\/figure>\n<\/div>\nCommon Pitfalls<\/h2>\n
\n
![\"white](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-262488.jpeg\")
<\/figure>\n<\/div>\n\n
What Should <\/em>You Do Instead? <\/h2>\n
Debt Management, Emergency Fund, and Other \u201cOrder of Operations\u201d<\/h4>\n
![\"stack](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-256559.jpeg\")
<\/figure>\n<\/div>\nFinancial Planning and Investment Management<\/h4>\n
Lifestyle Upgrades and Big Purchases<\/h4>\n
![\"white](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-273886.jpeg\")
<\/figure>\n<\/div>\nEstate Planning <\/h4>\n
Giving<\/h4>\n
![\"a](\"https:\/\/bestinterest.blog\/wp-content\/uploads\/2024\/10\/pexels-photo-6591164.jpeg\")
<\/figure>\n<\/div>\nSign Here\u2026<\/h2>\n