BMO Family Office
If you’re lucky, you could end up living everyone’s dream: coming into a big sum of money. Your unexpected money could come from a variety of sources. You might win the lottery, land a significant signing bonus at work or inherit money from family. According to The Wall Street Journal, estimates indicate that millennials will inherit a collective $30 trillion in wealth from their baby boomer relatives in the next few decades.
Wherever the money comes from, chances are good that it will be a once-in-a-lifetime payout. Here are some tips for managing your unexpected windfall so it lasts.
1. Take your time. Wait 6 – 12 months after receiving the money to make major financial decisions. You might need the time to reconsider your financial priorities. Also, if the windfall is an inheritance from a lost loved one, you may need time to process your grief, suggests the American Institute of Certified Public Accountants (AICPA).
In the meantime, keep your money in a safe spot such as a money market account or certificate of deposit. One exception: go ahead and use some of the money to pay off high-interest debt, if you have any (see tip #5).
2. Know your numbers. Gather information about your newfound money and any taxes you owe. That will tell you how much money is actually available to use. Next, make a list of your debts, suggests the Financial Industry Regulatory Authority (FINRA). Debts could include student loans, a mortgage, credit cards balances and auto loans.
3. Set up a team of trusted advisors. Even if you’re fairly money-savvy, you might benefit from talking to an attorney, tax accountant and/or wealth advisor, suggests Kiplinger. Experts can advise you about your possible money options, and offer pros and cons of each choice. Start with someone you trust—such as your current banker or your parents’ financial advisor. Later you can expand your team to more advisors.
4. Create an emergency fund. Set aside three to six months’ worth of essential expenses (rent, utilities, groceries, insurance, etc.) in a checking or savings account, suggests Business Insider. This financial buffer could come in handy if you have surprise expenses, like a major car repair, or if you lose your job.
5. Pay off debt. Start by paying down past-due or high-interest debt accounts first, suggests FINRA. It doesn’t make sense to leave your money in a 1%-earning savings account while continuing to pay 15% on a credit card balance. Get professional advice on whether or not to pay off lower-interest debt like a mortgage or student loans.
6. Consider creating an income stream. If you invest a portion of your windfall, you may be able to withdraw dividends regularly to help pay for your ongoing expenses. You may want to put income-stream money into after-tax investments rather than an IRA or other retirement funds. Why? You pay penalties and fees when you withdraw money from retirement-oriented funds before age 59½.
7. Set some big goals. Now you’re getting to the fun part. With the money that’s left, pick a few financial priorities. Retirement might be at the top of your list. Consider putting the maximum possible into your retirement accounts each year, or at least enough to get the company match if you’re employed.
Other goals might include saving a down payment for a house, starting a side business or preparing to have children. It can sometimes be helpful to separate your money into different accounts for different goals.
8. Be charitable—but cautious. A windfall gives you a great opportunity to make donations to organizations you value, or to help out family and friends. However, be careful about how much information and money you share. It’s important not to let others take advantage of you.
When it comes to charitable giving, consider pinpointing your giving priorities by creating a philanthropic mission statement, suggests Kiplinger.
9. Treat yourself. Don’t forget to use a bit of your windfall as fun money. For instance, you might want to plan a big vacation or buy a new car. It’s reasonable to set aside 5-10% of your total windfall for a splurge, according to The Wall Street Journal.
By the way, all of these principles hold true whether your windfall is $20,000 or $200,000. You should go through the same steps to make sure you use your money well.
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