What to do with a Financial Windfall?

If $1,000 dropped into your lap tomorrow, would you know what you would do with it? How about $10,000 or even $150,000? A financial windfall of any amount is a nice treat at times, but how do you decide what to do with that financial windfall?

A financial windfall is an irregular and often unexpected financial gain. Common examples of these are:

• A large tax refund
• Prize winnings
• Gift or inheritance
• Bonus
• Lottery or other gambling winnings
• Student loan forgiveness refunds

The amount of these can range anywhere from a modest amount all the way to a life-changing figure, and deciding what to do with them can be a challenging choice. 

These financial windfalls can be key in your path to generating wealth. Using a financial windfall strategically in saving for the future or paying down debt while you are at the start of your financial journey will give this money time to compound or grow exponentially as the years pass. 

Once you receive the windfall or receive notice that you are receiving a financial windfall, here are six steps to help you figure out what to do with it. 

Don’t do anything immediately.

Don’t rush to do something with it immediately. It is ok to leave your financial windfall in a savings account for several weeks or even months while you figure out your plan. The larger the windfall, the more careful consideration you should take, even consulting a professional if there will be tax or other financial considerations before you take any steps. 

Take inventory of your current financial position.

Check in with your current financial situation and ensure you are aware of where your debt repayment plan is at, and your savings or investing goals are at for the year. Doing this may help you identify easy options to use all or part of the money for:

• Paying off a small nagging debt completely
• Contribute a lump sum amount to your IRA for the year
• Meet a savings goal that you are this close to meeting

Review your financial goals or priorities.

We get the most out of our finances when our spending aligns with our values and priorities. Review your priorities (or take the time to identify your priorities with this post!), and identify which ones could be impacted by the financial windfall. Having your priorities in the forefront of your mind as you begin making a plan will help ensure that you are spending according to your values and do not look back on this financial windfall with regret. 

Carve out a part of it for something fun.

Yes, I am telling you to find something fun, indulgent, or frivolous and spend some of this windfall on it. A financial windfall is a treat and by treating yourself with part of the windfall, you are better able to make wise decisions with the rest of it. 

I usually plan to spend 5%-15% of the windfall on something that I want, which varies depending on my wants and needs at the moment. Even if you have plans for the entire financial windfall, carve out $20 and pick up your favorite takeout dinner to indulge in one night. 

Much of your spending money is a mental decision, and that decision is correlated with feel-good chemicals like dopamine and serotonin. By taking this financial windfall and using most of it towards building long-term wealth, and some of it for something you enjoy, you are rewarding your smart financial choices with a good surge of those feel-good chemicals. Repeating this action several times will help you develop positive feelings towards saving money (rather than feeling deprived), and small steps towards building wealth will become habits.  

Make a plan.

Take the time to make a plan and write down that plan (if it has more than one or two steps to it!) If the windfall is larger then the plan may be more complicated than a smaller windfall. Take the time to plot out your plan and don’t forget to consider taxes on any of the windfall that was earned. 

One idea to consider if you are already contributing full amounts to your IRA and savings accounts, is to increase your workplace retirement contribution for a short period of time, and use this windfall to supplement your living expenses. If you are not maxing out your workplace retirement account, using this strategy for a period of time can be helpful in allowing you to “stuff” more into your retirement account that you would otherwise be able to afford. 

You can do this by updating your workplace retirement contribution amount through your HR or payroll processor at work. See what the difference is between your normal paycheck and this new lesser paycheck. Set up an automatic transfer of the difference from your savings account where the windfall is, into your regular checking account on the days you get paid. 

This trick can be beneficial if the financial windfall you receive is subject to taxes because you can increase your traditional workplace retirement contributions, which are tax-deductible. So the tax deduction will offset some of the additional income, and make the pain a little less at tax time. 

A word of advice. Don’t get stuck on this step trying to figure out the “absolute best” choice. Many of the options you are coming up with are all good choices. It is better to make a good plan that happens than a great plan that never gets put into action. 

Execute that plan.

Now the fun starts! Get going on executing that brilliant plan you made! This may look like a bunch of money transfers to get the financial windfall where it needs to go, or it may look like a spending spree to purchase some assets. Either way, make sure you are executing that plan so the money is put to use rather than sitting in a savings account with no purpose! Once you are done, sit back and enjoy the feeling knowing you have made a positive choice for your future wealth. 

What to do for a life-changing financial windfall?

If your financial windfall is a life-changing amount to you, then there are some additional steps that you will want to consider. 

Don’t share this information with anyone outside your closest circle of people in your life.

This is the kind of information that financial predators love to learn about. Expect to be on the call list for financial planners, stock salesmen, and get rich quick schemes if this information becomes public. So while you make your plans, keep the information private. 

Watch out for long-lost friends and relatives.

Before anyone knows about this life-changing event, make a plan of how much you are comfortable giving away to either charities you believe in or to family members/friends who ask for money. It will happen. By processing this decision ahead of time, and setting firm boundaries, you can more easily turn down Uncle Fred when he comes and asks for a loan for his latest and greatest invention. 

Remember that this money is yours, and it is your responsibility to use it in the best way for you and your immediate family (meaning spouse, children, or anyone who depends on your income). Make sure that you are comfortable with the sacrifice you are making for any amount that you give away. 

Don’t make major life changes immediately.

Take some time for this life-changing event to sink in. Don’t immediately quit your job, buy a yacht, or book a seat on the next Blue Origin space launch. This is a whole new situation for you, and making spontaneous decisions can lead to regret or wasted spending. 

Be aware of FDIC insurance coverage limits.

The government insures bank accounts up to $250,000 per person at each individual bank, just in the unlikely case the bank fails. If you receive a windfall at or above $250,000 be aware of these rules so you do not end up losing any money in the unlikely event of a bank failure. There are more details in this post, and information about creative accounts rules that can help protect your money.  

If you received a financial windfall of $5,000 tomorrow what is the “fun” thing you would do with it to treat or indulge yourself? I am sharing mine in the comments below and over on Instagram, I would love to hear yours too!

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