7 smart steps to take immediately after receiving a financial windfall

Imagine waking up one morning to find that you’ve just won the lottery, made a massive stock market gain, or inherited assets from a long-lost relative or benefactor. The surprise, excitement, and perhaps a dash of confusion can be overwhelming.

But what do you do next? How do you ensure this unexpected fortune doesn’t evaporate but instead secures your future and helps you achieve your dreams?

To manage and protect your financial windfall, you’ll want to take these seven crucial steps: 1) Breathe and stay calm 2) Assemble a professional team 3) Pay off debts 4) Make a spending plan 5) Invest wisely 6) Pay your taxes and 7) Consider giving back.

In this article, we’ll guide you through these seven crucial steps to take when you find yourself on the receiving end of unexpected riches. Discover how to handle your windfall wealth, so that it transforms your life in the most positive of ways.

1. Don’t rush: The importance of taking a moment

When you receive a financial windfall, the initial emotional rush might push you to make impulsive decisions.

Some individuals might be tempted to make extravagant purchases or embark on lavish vacations. Others might suddenly quit their job without a plan for sustainable income.

Additionally, some may start lending or giving away money to friends and family without considering the long-term implications. These actions, while understandable, can lead to rapid depletion of the newfound wealth if not managed carefully.

Take the case of lottery winner Jack Whittaker. He made impromptu purchases and generous gifts after winning a $315 million Powerball jackpot in 2002.

Whittaker barely had time to recover from the shock of his huge win before his problems began. He was hounded by people asking for money. He became victim to unscrupulous hucksters looking to take advantage of his generosity.

He was plagued by scandals, lawsuits, and personal tragedies. At one point, he even commented that he wished he’d torn up his winning lottery ticket.  

The lesson? Should you ever find yourself on the receiving end of a huge fortune, take a step back and breathe. Take time to process the situation, make a plan to safeguard your money, and avoid the temptation to make rapid lifestyle changes you might regret later.

2. Assemble your financial team: Get professional advice

Choosing the right financial advisors can be critical in effectively managing a financial windfall. These professionals provide the expertise and experience to guide you in making informed decisions about your newfound wealth.

A certified financial planner can help you devise a comprehensive financial strategy that aligns with your long-term goals and risk tolerance.

An estate attorney can assist with estate planning to ensure your wealth is distributed as per your wishes upon your death, while minimizing estate taxes.

A tax advisor is essential to navigate the complex landscape of taxes. This is especially important when dealing with large sums of money. They can help identify tax-efficient strategies for investing, spending, and gifting.

These advisors can help you understand the implications of different financial decisions, providing invaluable advice on preserving and growing your wealth. They can steer you clear of common pitfalls and ensure your financial decisions align with your overall life goals.

Importantly, they can provide a sense of calm and order in what may be an overwhelming time. It’s key to select advisors you trust, who understand your goals, and who have a proven track record managing significant wealth.

3. Plan your debt strategy: Paying off debts smartly

Coming into a large sum of money provides an excellent opportunity to tackle any outstanding debts you may have. Creating a debt strategy can help you approach this task in an organized and effective way.

First, you’ll want to make a comprehensive list of all your debts. This includes credit cards, student loans, mortgages, auto loans, and any personal loans you might have. For each debt, note the total amount owed, the interest rate, and the minimum monthly payment.

Next, prioritize your debts and develop a repayment strategy. Some experts recommend paying off the smaller debts first for the satisfaction of crossing them off your list.

Others say a more effective strategy involves focusing on the debts with the highest interest rates regardless of the balance owed. This approach, known as the “avalanche method,” can save you money over the long run because you’ll be reducing the amount of interest you’re paying.

However, if you find the prospect of paying off smaller debts first more motivating, you might decide on the “snowball method.” This is where you pay off debts from smallest to largest regardless of the interest rate.

Dave Ramsey, a well-known financial advisor and radio host, is famous for promoting the debt snowball method of debt repayment. He believes this strategy is more effective because you’ll be motivated by how rapidly you begin to see results.

Once you quickly pay off a smaller debt, you’ll be more apt to believe that getting out of debt is a reality for you. This will spur you to continue your efforts.  

4. Set a budget: The importance of planning for the future

Coming into unexpected riches can feel like an open invitation to spend freely. However, this approach can lead to rapid depletion of your wealth. That’s why setting a budget becomes critically important.

A budget serves as a financial roadmap, guiding your spending and saving decisions. It enables you to designate funds for various purposes. A budget ensures that important areas of your life are adequately financed while keeping frivolous spending in check.

There are numerous resources available that can help people start a budget. Here are a few to consider:

  • Budgeting Apps: These are particularly helpful for the tech-savvy. Some popular budgeting apps include Mint, YNAB (You Need a Budget), and PocketGuard. These apps link to your bank account and categorize your spending, making it easy to visualize where your money goes each month.
  • Spreadsheets: If you prefer a more hands-on approach, creating your own budget spreadsheet in Excel or Google Sheets can give you the flexibility to customize your budget. There are also plenty of free templates available online to get you started.
  • Online Courses: Websites like Coursera, Udemy, and Khan Academy offer courses on personal finance that include budgeting. These can provide a more in-depth understanding of how to set up and manage a budget.
  • Books: There are numerous books on the subject of personal finance and budgeting. Some popular titles include The Total Money Makeover by Dave Ramsey and Your Money or Your Life by Vicki Robin and Joe Dominguez.
  • Financial Planners: If you need more personalized help or have a complex financial situation, a certified financial planner (CFP) can provide professional guidance on creating a budget as part of a comprehensive financial plan.
  • Nonprofit Credit Counseling: Organizations like the National Foundation for Credit Counseling (NFCC) offer free or low-cost advice on budgeting and managing debt.

5. Invest wisely: Building a diverse portfolio

Investing wisely after receiving a financial windfall is critical to preserving and growing your newfound wealth. In fact, it’s one of the most effective ways to ensure that your windfall serves you not just today, but also in the future.

When you invest your money, you’re putting it to work in a way that has the potential to generate returns over time. This could be through the appreciation of stock values, property, or other assets, or through the receipt of interest or dividends.

Without proper investment, your money could lose value over time due to inflation or simply be spent without creating longer-term financial security.

If you’re new to investing, it might seem daunting. However, there are resources available to help you get started:

Investment Books: Some well-regarded books for beginner investors include The Intelligent Investor by Benjamin Graham, A Random Walk Down Wall Street by Burton Malkiel, and The Little Book of Common Sense Investing by John C. Bogle.

Online Courses: Websites like Coursera and Udemy offer courses on investing. These can help you understand the basics, like the difference between stocks and bonds, what mutual funds are, and how to analyze a company’s financials.

Financial News Sites: Websites like CNBC, Bloomberg, and MarketWatch can provide up-to-date news and insights about the financial markets.

Financial Advisors: A certified financial planner or a registered investment advisor can provide personalized advice based on your specific circumstances. They can help you develop an investment strategy that aligns with your financial goals and risk tolerance.

Remember, investing involves risk, and it’s important to do your homework before diving in. It’s also crucial to have a diversified portfolio to spread risk.

This means investing in a mix of different asset types, industries, and geographic regions. When in doubt, seeking advice from a financial professional can be a wise move.

6. Don’t forget taxes: Understanding your tax obligations

Receiving an unexpected fortune can significantly alter your tax situation. Understanding these implications is crucial to managing your money wisely. Taxes can take a large bite out of your windfall, and without careful planning, you could end up owing a hefty bill to the government.

The tax implications can vary greatly depending on the source of the money. For instance, lottery winnings are typically subject to a high level of tax, and the amount you take home can be significantly less than the advertised jackpot.

Similarly, if you’ve inherited a large sum of cash or property, you may be responsible for paying estate or inheritance tax. If your windfall comes from the sale of stocks or property, you’ll likely need to pay capital gains tax.

Understanding these tax implications can help you plan and budget accordingly. It’s also important to consider how your windfall may bump you into a higher tax bracket, which could impact the amount of tax you owe on your overall income.

In addition to the immediate tax implications, you’ll also want to consider the long-term effects on your tax situation. For instance, large sums of money can generate significant amounts of interest, dividends, or capital gains, all of which may be taxable.

A tax professional or financial advisor can provide invaluable assistance in this area. They can help you understand your tax obligations, take advantage of any applicable tax breaks or deductions, and develop a strategy to minimize your tax liability where possible.

You might also consider strategies such as charitable giving or setting up a trust, which can provide tax benefits while also helping you achieve other financial or personal goals.

7. Give back: The joy of philanthropy

Finally, consider giving back. Philanthropy can provide a sense of fulfillment and help make the world a better place.

However, deciding where to give money after receiving a windfall can be a complex process. Here are several steps that you can take to make that decision:

Reflect on Personal Values and Interests: Consider what you care about the most. This could be anything from education, health, the environment, to social justice, art, or animal welfare. Starting with your passions can help you find organizations that align with your values and interests.

Define Your Philanthropic Goals: What do you want to accomplish with your donation? This could be supporting ongoing work in an area you care about, sparking change in a specific community, funding research for a cause, or providing immediate relief in a crisis. Defining your goals will help you identify organizations that align with those aims.

Conduct Research: Once you have a list of potential organizations, do your homework. Look into each organization’s mission, programs, effectiveness, and financial health. Resources such as Charity Navigator, GuideStar, and the Better Business Bureau can provide useful information. You may also want to look at the charity’s annual reports and any evaluations of their programs.

Consult with Experts: If the amount of money you plan to give away is substantial, it might be helpful to consult with experts. This can include financial advisors, attorneys, and philanthropic advisors. They can help you understand the tax implications of your donations, the best ways to structure your giving, and can provide insights about potential recipient organizations.

Remember, there is no one “right” way to give. The best choice is the one that aligns with your values and goals, and which you believe will make the most positive impact.

Stay grounded and enjoy your prosperity

Receiving a financial windfall is a life-altering experience that can provide you with both opportunities and challenges. The benefits are undeniably transformative, and they extend beyond the personal realm.

Individuals who come into sudden wealth can shape their legacy, support causes they deeply care about, and effect real change. From funding research to alleviate global health crises, to supporting local communities, to championing education and arts, the possibilities for philanthropic endeavors are vast.

However, managing significant amounts of money requires careful thought and planning. It’s crucial for you to navigate the process wisely. You’ll likely need to seek professional advice to ensure you manage and distribute your fortune wisely.

Ultimately, windfall wealth can serve as a tool for you to create positive change, leaving a lasting impact on the world. It’s a unique opportunity to transform your life and the lives of others, making it a truly rewarding journey.

Elizabeth Blessing

Elizabeth Blessing is the founder of Windfall Wealth Report. She has over 10 years of experience as a freelance personal finance writer. Her clients have included Investopedia, Investing Daily, The Lazy Trader, and Leeb Financial.

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