Receiving a windfall
When receiving a windfall, i.e. an inheritence, gambling or monetary gift, the best way to use your windfall is to repay debts that you may have.
An action plan for windfalls
- Seek professional advice on taxes and legal matters
- Deposit funds in insured bank accounts to ensure safety
- Don’t make any big financial decisions for at least six months
- Pay down debts, especially those with higher interest rates such as credit cards
- Update your liability insurance coverage
Make no promises
When very large amounts of money are received, don’t casually promise to buy anything or give anyone any money. Your new found wealth can be a lightning rod for attracting the attention of family and friends to everything you say or do.
Strengthen your safety net
When suddenly coming into very large amounts of money, you not only have more money but also have more to lose. Increase your liability coverage by purchasing an excess liability insurance policy and coordinating the coverage with your auto and homeowners policies.
Take it slow before you make any investments. First, increase contributions to retirement plans to the maximum permitted by the plan, make catch-up contributions and contribute to a Roth IRA if allowed.
Get more interest
The next step is to check out the interest rate your cash is earning while you are taking time to consider longer-term financial decisions.
Plan for and pay taxes
Some lump sum payments are not subject to income taxes, like tax refunds (unless you claimed a deduction for the taxes in prior years), gifts, inheritance and life insurance benefits. Payments for severance, bonus, proceeds from the sale of a business or real estate, lottery or prize winnings, payments from court awards and proceeds from the exercise of stock options, however, are all generally taxable