How to Get the Most of Your Financial Windfall
A massive monetary windfall like winning the lottery, receiving an insurance payout, or gaining an inheritance is far more exciting than any financial planning or saving strategy. However, it comes with equally colossal responsibilities. As American businessman and author Robert Kiyosaki once said, “It’s not how much you make that counts but how much you keep.”
If you need proof of this statement, lottery statistics show that a whopping 70% of jackpot winners go broke a few years after receiving their instant millions. So, what should you do if such fortunes await you? Let these tips guide you toward the right path to a stronger financial future.
Take a Breather
In most cases, financial windfalls come with personal loss or instant gains. Whatever circumstance you go through, the experience can be overwhelming.
Before you make hasty decisions like buying a new house, booking a year-long vacation, or starting a new business, take a breather first. Whether you’re feeling devastated or ecstatic, it’s not ideal to make financial decisions while you’re emotional.
Instead, put your money in a savings or money market account while you determine how much to spend and save. Doing so will prevent you from spending on things you will surely regret in the future.
Determine Your Taxes
Don’t think for one second that you can enjoy massive instant earnings in their entirety. Receiving financial windfalls will likely incur hefty income, capital gains, or estate taxes.
Before spending a dime of your unexpected fees, it’s best to learn how much you will owe the government. For instance, going back to the earlier example, here are a few notes on lottery winnings taxes to consider:
You can choose a 30-year payout period or a one-time lump sum. Obviously, most people go for the cash option.
If you win the jackpot in the lottery and go for the lump-sum payment plan, you have to pay up to 24% in federal taxes right away.
Afterward, you have to pay the difference between 24% and 37% during tax season the following year.
Also, some states tax lottery winnings, with New York having the highest percentage at 8.82%. California, Florida, and Tennessee are some states that don’t tax these incomes.
Ask for Help
You’ve probably noticed how complex the tax system is for a financial windfall. If you don’t have a financial planning or saving strategy in mind, it’s okay to ask for help. Remember that these earnings come with taxes, legal requirements, and long-term consequences that affect your financial situation.
Just as you would see a doctor for a medical concern, it’s also best to work with experienced experts to make the most out of your fortune. Here are some institutions and individuals who can help:
Nonprofit organizations designed for financial wellness: Groups like MoneyFit can help you avoid bankruptcy, set current and future budgets, and achieve peace of mind.
Certified Public Accountant (CPA): With such an expert on your side, you can protect your newly acquired assets and develop a sound tax strategy for many years to come.
Financial planner: This specialist can help you create a plan to pay debts, invest in profitable trades, and save for the future.
Set Clear Goals
Once you decide on which organizations or individuals you want to work with — feel free to hire multiple experts — you need to set clear financial goals. Don’t hold off anything from specialists. Whatever you want to achieve, from sending a child to an expensive college to opening a Planet Fitness branch to buying a luxury car, be open about your goals.
For starters, write down your objectives and rank them by importance. You can discuss each one with your advisors and determine a plan of action. If anything on your list can harm your financial future, your organization or individual of choice will let you know.
The goal of hiring experts on your side is not for them to tell you how to live your life but rather how to splurge and save in a way that will protect you from losses you can’t manage.
Pay Off Consumer Debt
Do you have any costly high-interest dues like a student loan or credit card debt? If you come across unexpected wealth and can afford to, eliminate such liabilities immediately. Paying interest won’t benefit you, and doing so will positively impact your credit score.
However, you can deduct interest on mortgages and some student loans from your taxes. In these cases, it’s best to keep the debt and put your windfall in other investments. If you’re not sure how to do this, find a finance professional to help you.
Plan for Your Retirement
No matter what age you receive your financial windfall, it’s never too early to make your money work to secure your future. Remember that even a few years of compounding interest can do wonders for your savings. Ultimately, the goal is to retire comfortably in your old age, which experts say should be 80% off your pre-retirement income yearly.
One viable option is to fund your Individual Retirement Account (IRA). For instance, if you add $6,000 annually to your IRA, you can have an account worth $239,956 after 20 years. Inform your financial team about such a plan to optimize your monetary movements toward achieving your goals.
After you determine your taxes, set goals, pay off debts, and plan your retirement, don’t hesitate to treat yourself and your loved ones to something you’ve always wanted. It’s not every day you come across unexpected income, so why not make the most out of it?
You only live once, so splurge on something worthwhile. Have you always dreamed of building a pool, taking a trip to Norway to see the Northern Lights, or owning a recreational vehicle (RV)? If you have enough money left after being a responsible windfall receiver, go for it.
Make Your Windfall Last
Whatever your income sources, including an unexpected windfall, make sure to make the most out of it. After all, with financial planning and saving strategies, it’s never too late to secure your future.
Don’t be like typical lottery winners who go bankrupt in a few years. When you receive an unexpected income source, it’s best to educate yourself about its advantages, potential earnings, and repercussions.
Check out MoneyFit Academy to discover practical ways to make your windfall last. You will find everything you need in one convenient platform, from debt management to saving guides to financial counseling services.
About the Author
Rick’s been with Money Fit by DRS for 18 years and early in his career, he managed two divisions, customer service, and credit counseling, before settling in his current role of managing the organization’s marketing efforts. He is known for being someone who’d give the shirt off of his back for you, and smile while doing it! He takes that positivity and problem solving to consumers when relaying a message of help, hope, and better times ahead. When he isn’t helping consumers regain control of their debt, he loves traveling and seeing new places.