What to Do With a Windfall
A financial windfall can solve a host of problems--and cause more, including tax and legal predicaments. Whether it’s from the lottery, a legal settlement, stock options, life insurance proceeds, a buyout or an inheritance, the first step is to do nothing.
* Don’t rush. Put the money in a safe, accessible interest-earning investment, such as a money market mutual fund, while you decide what to do. You may want to choose a tax-exempt money market fund to reduce your potential tax bill. For investing basics, see http://ukobiw.net/INVEST101.
* Get tax help. While inheritances and life insurance proceeds are generally tax-free to the recipient, gambling winnings, prizes, legal settlements or awards and other windfalls typically will increase your tax bill. Large sums of money can affect other financial obligations, including child support, debt repayment plans and student financial aid. For help in finding a tax advisor, visit the California Society of Certified Public Accountants’ site at https://www.calcpa.org or the National Assn. of Enrolled Agents at https://www.naea.org.
* Get financial help. Even the most savvy investor can feel overwhelmed by a sudden cash infusion. Having an objective source of financial advice and support is even more important to people with little investing experience or a history of mismanaging money. For more information on selecting a financial advisor, visit http://ukobiw.net/finplan.
* Consider your goals. Knowing that you want a comfortable retirement or enough money to travel frequently can help you resist the urge to splurge on too many goodies that will break, rust or be long forgotten by the time the bills come in.
* Pay off your debts. Paying off consumer debt is a virtual no-brainer. That includes car loans, credit cards and other personal debt. Whether it makes sense to pay off tax-deductible debt such as home mortgages and some student loans depends on your total financial situation; seek your financial advisor’s counsel.
* Have some fun. Having and spending money is a pleasure; having a plan for your windfall will help free you to cut loose once in a while.
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