5 Essential Ways to Maximize a Financial Windfall

We’ve all heard about lottery winners who went bankrupt within a few years after their big win. Or clucked over cautionary tales of those who blew through their trust funds or inheritances (do I discern a hint of schadenfreude here?) faster than it takes to say: bartender, make mine a double, and are now worse off than ever.

Often when people come into money by happenstance, they treat it differently than cash they have worked hard to earn. When you "find" big money – whether from a lottery win, settlement, tax refund, bonus check, dividends or freak accident – it’s much easier to throw caution to the wind and waste it in ways you might not regret until later.

Even those who are financially savvy can get tripped up by their (perceived) newfound wealth and its possibilities. The temptations of a new car, bigger house, dream vacation, sugar daddy-hood or even telling your boss to shove off can be very enticing indeed. (For more, see: A Defined Benefit Plan for Small Business Owners.)

Mistakes are inevitable when people rush into big purchases, life decisions, giving money away or inappropriate investments without taking the time to develop a sound plan. Let me offer a few suggestions to help avoid costly mistakes while making the most of your new financial reality.

Do Something Nice for Yourself 

Didn’t see that one coming did you? (For the record, friends, my name is not Ebenezer Rae.) Hopefully, a small indulgence can keep you from making the bigger over-the-top purchases that would blow your windfall back down to zero. Become an expert in "splurgeconomics" and map out in advance how much you want to spend. Otherwise, one splurge can easily turn into a habit of splurging and poof, the money is gone.

Remember the Tax Man

You may get a big chunk of money but that doesn’t mean you get to keep it all. Uncle Sam will have some very definitive ideas on the distribution of your funds, will not be reticent about letting you know this and most definitely will be keeping tabs until you fork it over. I recently appeared on CBS News giving tips on what to do if you won the billion dollar Powerball and we started with a good five minutes of “windfall horror stories.” I simply Googled “lottery winners go broke” and stopped scrolling after 10 full pages of results. (For more, see: Sudden Wealth: How to Handle a Cash Influx.)

Remember all the winners of Survivor who won a million bucks on the show? Well I wonder many of their windfalls survived their spending habits and taxes due. Some windfalls, like insurance payouts, are tax-free but you’ve got to make it your business to find out. So if big money comes your way, your first response should be to call your accountant or financial planner. Then, and only then, should your second response be to book that dream trip to Fiji.

Keep Your Job

Ask yourself this: if you didn’t have to go to work every day do you think you would spend more or less? Telling your boss to take a hike may seem like a dream, but without a plan this could quickly turn into a nightmare. I can’t tell you how frequently people underestimate how much money they will actually need to replace their income. By some estimates, if you make $50,000 per year, you would want a nest egg of at least $1 million dollars to replace your current standard of living. And if you want to increase your standard of living, your reserves need to reflect this proportionately. Also, by not working, and this is a biggie, you will accrue less Social Security benefits to use later on in life. 

I’m not saying you can’t quit your job eventually, but I am saying not to rush. A good friend of mine always reminds herself when she sees herself rushing into an important decision, “Take your time, there is no firing squad at dawn.” Make sure you have a plan. Even if you are lucky enough to get a windfall large enough to never have to work again, you should still have a plan to make that money last the rest of your life. This task can be difficult enough when “retiring” at a normal age, but the earlier you stop working the longer the money will have to last. Your 90-year-old self is counting on that money, so don’t screw it up. (For more, see: Top 10 Mistakes to Avoid on Your 401(k).)

Take Care of Yourself 

It’s amazing how many “friends” pop up when receive a windfall or how many cousins living in countries you’ve never heard of suddenly need hundreds of thousands of dollars to study underwater basket weaving at Harvard or Yale. Those are the hands that are trying to reach into your pocket to get a piece of the pie. Slap ’em down, I say! But before you spend any money on others, make sure you own financial house is in order.

  • Figure out how this windfall may bring you more money in the long run, whether this means investing in your education to further your career or just investing the money. Could that MBA lead to a big promotion or pay bump?
  • Don’t forget to take a good look at your retirement accounts. Even if you feel you’ve put enough away for retirement already, building these accounts to the max can help save you some money on taxes. They may also help spruce up your retirement income total or maybe help you retire just a bit sooner. And while a retirement account will tie up your money for awhile, if you are prone to blowing through cash too fast, this can be a good thing for your long-term financial health and your short-term peace of mind.
  • So many things may sound like great ideas that could well leave you feeling handcuffed financially down the road. While it might sound like a good thing to pay off your mortgage in full or your kids’ student loans (or your own for that matter), it may not make sense financially in the long run.  Even jumping into some new risky business venture can easily turn into a money pit, sucking your nest egg dry. (For more, see: How to Cut Back on Spending Like a Billionaire.)

Consult Your Financial Team 

If you don’t have a professional and experienced financial team, now is the time to get one. Many people aren’t used to dealing with large sums of money and the thought of it can be overwhelming and extremely stressful. Your team should include a Certified Financial Planner, accountant and in many cases an estate planning attorney (because, guess what?, now you actually have an estate.) They should also help you get your financial house in order and keep it that way.

If you know a windfall or inheritance is coming your way, plan ahead. It’s much harder to think clearly when the money is sitting in your bank account, ready (read: screaming) to be spent. And your stress levels will be out the roof the more you have to rush around as various deadlines approach. Take a breath, assemble your team, formulate a plan and stick with it. Putting the money to work for you now could help you improve your overall standard of living for the rest of your life. Here’s me to your 90-year-old self: You’re welcome.

Spending the money as fast as possible may seem fabulous, but you will wake up and your opportunity at wealth will be gone with the wind. (For related reading, see: The Importance of Personal Finance Knowledge.)

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through Trilogy Capital, a Registered Investment Adviser. Trilogy Capital, Trilogy Financial and NPC are separate and unrelated companies.