Got a Windfall? Here’s What You Should Do

Winning the lottery, selling a business or home, and being the heir of a sizable estate are among the valid and common ways to get a lot of money all at once. But what would you do if this happened to you? For many people, a large lump sum of cash feels like an opportunity to unlock items and experiences that previously seemed out of reach. How you handle it, however, will be important in ensuring you get the most value out of your newfound wealth.

In this article, we’ll offer perspective on the steps you should take as a recipient of a substantial financial windfall. We’ll cover mistakes to avoid, the value of employing a professional, and ways you can make the most of your money in the short and long term.

1. Avoid Common Mistakes

Before understanding the ideal steps after instantly receiving a lot of money, it’s important to be aware of actions to avoid. Once you have a handle on this, it may better inform what you intend to do.

Here are some behaviors to consider staying away from:

Purchasing on Impulse

Imagine winning the lottery and getting a lump sum of nearly $1 million. It’ll only be natural to begin considering how you can spend the money. This might include buying a new home, going on a luxurious vacation, or getting a new car. However, Paul Miller, Managing Partner and CPA at Miller & Company, LLP in New York City, emphasizes that it’s a mistake to “take the money up front and spend it without thought.”

Acting on these immediate, almost instinctual desires that pop into your mind can be a way to jeopardize your cash pool — at least if you don’t have a defined strategy. While it can feel like a large amount of money could take years to spend, several big purchases can quickly drain it away.

Buying a home, for example, could cost a significant chunk just from a down payment. Similarly, a brand-new, luxurious car can cost close to or upwards of six figures. After just a few purchases, your million could feel a lot smaller.

Being Overly Generous

Another instinct you might have after getting a windfall is to help your friends or family monetarily. While noble in theory, this can be a pathway to draining your funds. Because you have more money, you might feel like you can give away more money at a time to share your wealth, sometimes in the tens of thousands. Like the impulsive luxury purchases mentioned above, this can rapidly add up.

On the other hand, if you start small, the recipients of your gifts might come to expect you to be a benefactor on a more consistent basis. Instead of paying yourself in more valuable ways, such as your retirement accounts or investments, your money may be gone and, unfortunately, could be spent in ways you didn’t intend.

Being Too Trusting

Be wary of trusting the wrong people after receiving your windfall. Many individuals, even family and friends in some cases, may have ideas they want to passionately share on how you should use your money. For instance, you may get pitches about unique business opportunities, investments, or places you should move. While these may sound convincing, it’s best to trust yourself and, as we’ll mention further, an experienced advisor.

Professionals don’t always have your best interest in mind as well, however. Some may earn commissions on products they recommend to you, presenting a conflict of interest that may supersede what would benefit you the most. For this reason, you’ll want to ensure you work with a financial professional who’s upfront about their business practices and compensation and upholds a fiduciary duty.

Feeling Too Comfortable

After a major windfall, it’s critical to understand that while the money can be life-changing, it’s beneficial to practice stability. Making drastic changes to your lifestyle, such as quitting your job or spending above your means can be pitfalls.

“I have had many clients who after winning the lotto have nothing to show for it,” Miller explains. “They became lazy and didn’t work and after 20 years when the payments stopped they were worse off than when they started,” he continues.

2. Seek Professional Expertise

Suddenly receiving a lot of money, as noted, can be exciting, but it can also be jarring. You’ll face new challenges, such as falling into a different tax bracket, wondering how to use it effectively in the present and future, and understanding how it will impact your retirement and investing strategies. Therefore, one of the most vital resources you have in your arsenal following a windfall of any kind is an experienced financial advisor’s expertise.

“Winning the lotto is a time to be clever,” says Miller, a CPA. “You should immediately contact your CPA. Every situation is different and…needs to be carefully examined,” he recommends.

With expert assistance, you’ll be able to gain more clarity on how to comply with taxes and how the money you’ve received could bolster various areas of your life. For example, a financial planner could assist you with creating a comprehensive roadmap to reach goals such as retirement or paying off your child’s college education.

At this point, you may wonder, “Which type of financial professional should I choose?” While there are many options, it’s important to consider ones with your best interest in mind and who follow a fiduciary duty. For instance, experts with titles such as Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), or Certified Public Accountant (CPA) must adhere to high standards.

To find a high-quality advisor who fits your needs, we recommend comparing vetted professionals alongside each other. One way to do this is with matching tools, such as this one. After answering a short list of questions regarding your goals and circumstances, it will present you with up to three options.

3. Use It as an Immediate Tool

Perhaps the opposite of the impulsive purchases we mentioned above, you can think of your recently acquired money as a device to solve problems you may not have been able to before. A strong example is using it to pay off existing debts, especially if they collect high interest. Here are some examples of debt you could clear with a windfall:

• Credit card debt
• Student loans
• A car payment
• A mortgage

Another viable use for your windfall money is bolstering your emergency fund. This is money you stow away in case of an unforeseen situation, like losing a job, a medical event, or damage to your home or car, to name a few. A rule of thumb is putting away around three to six months of expenses; however, your financial advisor will be able to assess your needs and give you individual numbers to follow. If large enough, your newfound funds should position you well to prepare for emergencies.

4. Use it Toward Long-Term Goals

After receiving a windfall, it’s wise to consider the future. Think about what you want to achieve and how the money can help. While this will be unique for each person, there are many viable ways to leverage a large sum successfully.

For example, you could use the money to aid your retirement plans, including contributing to accounts such as IRAs, Roth IRAs, or 401(k)s, where it can grow with compound interest and investments. You could, ideally with the help of either a traditional or robo-advisor, set up a brokerage account and put together an investment portfolio that could grow the money you’ve received.

Another option is using your windfall to help others but with a plan and systems. For instance, you could set up a 529 plan to help pay for your children’s education. Unlike simply handing them money when the time is right, this has a defined purpose and comes with a range of tax benefits and potential for compound growth. You could also place money into a trust to give to your kids or relatives during your lifetime or as part of an estate plan.

5. Be Ready to Say “No”

While, as anyone may assume, receiving a windfall can be great, it can bring about various new challenges. While many of these are financially related, including being in a new tax bracket and deciding how to store and spend it, others are more personal.

One of the most prominent issues is pressure from others to share your money. Miller observes that many people may try to befriend you, sometimes out of the blue, or relatives “ask to borrow or for you to flat out give them money.” As highlighted in our section about mistakes, giving can lead to an ongoing drain on your funds.

Therefore, it’s important to learn how to say no to people who want your money. For friends, especially if they’re new, this may be easier. If you come from a tight-knit family, on the other hand, you might find it more difficult to set boundaries. Denying requests will have to become a learned skill, but one that will be necessary to preserve your funds.

You can potentially reduce attempts at your money by telling fewer people about it. Aim to keep people on a “need-to-know basis” about your net worth, only discussing it with people you trust. Per Miller, an appropriate point to remember is that “you have money and now you’re a target.”