Handling a Financial Windfall: Best Practices and Pitfalls to Avoid

Financial windfalls can change abruptly, so it’s critical to make wise judgments and stay away from dangers. The National Endowment for Financial Education (NEFE) estimates that 70% of persons who obtain an unexpected financial windfall will run out of money within a few years. Millennials are particularly susceptible to unexpected wealth traps since they may not yet have developed good financial practices.

If investors of any age are fortunate enough to come into a substantial quantity of money, they can follow these 8 stages.

1. Take a deep breath

Understanding the constraints of unexpected windfalls is paramount to avoid making life-altering decisions. Lottery winnings, which can vary from $20,000 to $30,000 annually, often lead lottery winners to overestimate their newfound wealth. A prudent approach involves instituting a ‘cooling-off’ period lasting six to twelve months before making any decisions, as a key component of effective sudden wealth planning.

2. Take a long view.

Assuring a solid financial basis, the Financial Industry Regulatory Authority (FINRA) suggests treating your windfall as a lifetime asset. Put feelings aside and create a long-term plan in order to efficiently manage this money.

3. Be prepared

To evaluate your financial condition, FINRA advises obtaining personal and financial records. Evaluate your present income, debts, and payment method for a windfall. The value of the windfall after taxes and fees must be determined.

4. Eliminate debt with a high-interest rate

Another way to “put your money to work” is to pay off debt. For instance, it would cost $4,115.44 and take 263 months to pay off a $3,000 credit card bill with an 18% APR. You can save or invest the money you would have paid in interest if you used your windfall to pay off debt.

5. Spend money on your future

List your objectives, calculate the costs of achieving them, and take retirement into account while creating a financial plan. Consider opening a retirement account if you don’t already have one. Make enough of a contribution to your company’s 401(k) to qualify for a match. Set up distinct savings and investment accounts and categorize your objectives into short-, medium-, and long-term categories.

6. Consider putting together a group of consultants

It might be difficult to develop an investment strategy, especially if you’ve never done it before. To handle your unanticipated wealth and accomplish your objectives, think about working with a financial expert, such as a broker, investment advisor, accountant, insurance agent, or financial planner. Ask friends and family for referrals, consult your state securities regulator, and think about employing a tax expert.

7. Stop being so generous

Although charitable deeds might be helpful, it’s crucial to use discretion and think of other methods to assist loved ones. According to Bruce McClary of the National Foundation for Credit Counseling, being overly charitable may result in the need for aid.

8. Keep con artists away from your money

Keep your guard up since receiving a windfall, especially one that others may learn about, like an inheritance or a lottery win, may make you a target for scammers.

You should familiarize yourself with the many varieties of fraud, how fraud occurs, and how to spot the warning signs of fraud in addition to investigating potential investments and specialists.


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