Get Started

By James Ahn, CFP®, AIF®, Senior Wealth Advisor

What would you do if you were to receive a sudden financial windfall?

This could take many different forms: an inheritance, the sale of a business, stock options, distributions from a trust, a legal settlement – or even winning the lottery.

How you should best utilize the proceeds from the windfall depends on your unique life circumstances, as well as the amount you receive. In simple terms, you have a few options: save, spend, or invest. In most situations, the best approach is to combine all three.

First things first: Don’t rush into any big decisions

The first step? Take a deep breath. Don’t make any rash decisions. Receiving a large sum of money all at once could lead to irrational decision making. Take the time to think through how you can take advantage of this windfall to both give yourself more financial stability and reach for your dreams.

Talking to your advisor can help you think through the decision-making process. Using the money only towards improving your lifestyle, for example, could be financially disadvantageous. Depending on the type(s) of debt you may have, paying them all off at once may not be in your best interest either. Take a long-term perspective: You can only spend the money once. This will allow you to make better decisions when you’re ready.

Consult with tax, financial and legal professionals

Speak with your tax, financial, and legal professionals. If the windfall has a significant impact on your net worth, you’ll want to determine whether the proceeds are taxable. If taxes are involved, make sure to set aside enough money to cover them or pay them now.

Your financial professional can help you make smart investment decisions and put you on a sustainable path of spending. Your legal professional can help create or update the appropriate legal structures to safeguard your assets. If you find that you now have responsibility for another person in conjunction with the windfall, you’ll need to plan with those responsibilities in mind, especially with regard to minor children or people with special needs.

Fund your emergency reserves

There’s no question that you should take advantage of this windfall to make sure your finances are on a very solid footing. Why not set aside six months’ worth of living expenses in a checking or high-yield savings account? These emergency reserves should only be used for true emergencies such as a loss of employment or medical emergency.

Update your financial plan

Whatever you’re considering, whether paying down debts, making new investments, making charitable gifts, buying a business (etc.!), you should update your financial plan before making any big decisions. In determining how to move forward with your newfound wealth, consider where you want to be financially and how you were previously tracking toward your goals.

Depending on the magnitude of the windfall, you may contemplate new goals that were not on your horizon before – or appeared to be out of reach. Why not take the time to imagine and deeply consider how this windfall could serve to reshape your future? For many, this could be a once-in-a-lifetime opportunity to make a life change they’ve been dreaming about.

Take the time to contemplate the what ifs. Picture the life you’d like to create for yourself over the next decade and more. Then go back to your financial plan and determine what’s feasible.

Have fun, splurge a little – but stay with your plan

Finally, don’t forget to enjoy your newfound wealth. It’s okay to set aside some of the windfall for fun money and allow yourself a small percentage purely for your entertainment. In general terms, this should probably be no more than 5-10% of the proceeds. It’s helpful to track the spending, stopping once you reach your predetermined limit: It’s all part of your plan. The rest of the money should be dedicated to investing in your future.

Dealing with a significant windfall takes careful planning in the long run to understand your limits and keep from overspending. Beyond understanding your limits is exploring your values and passions as well as your responsibilities and concerns for others. This is an investment of time that’s priceless. Knowing your priorities and commitments and planning for what truly matters to you will enable you to spend and invest that windfall wisely.

How do you balance having the life you want to enjoy today with what you’re going to need in the future? Are you doing what it takes to enter your dream retirement? TAKE OUR QUIZ to find out.