How to Manage a Financial Windfall
If you have the good fortune of striking it rich, a solid financial plan is key to having your “pot of gold” at the end of the rainbow.
You may dream about it every day, but what would you do if you actually experienced a financial windfall? An unexpected “pot of gold” from an inheritance, winning the lottery, or financial gifts means you’ll need to consider a number of important questions.
Should I quit my job? How much will I owe in taxes? What will I need for retirement? How should I plan for taking care of my children or elderly parents? It may be exciting and overwhelming to think about what to do and where to start first.
The amount of the unexpected money will determine the type of financial planning and professional guidance necessary to make the best use of your newfound wealth, whether immediately or in the future. Here are a few important points to consider:
Beware of Sharing Your Good News
- Limit the number of people you tell. Only share the news with a few trusted family members or friends.
- Money can change, disrupt or end relationships. It also can bring forth relatives or friends you never knew existed.
- Non-profit organizations could begin to solicit financial support.
- Fraudsters and thieves may find you an attractive target.
- Do not immediately quit your job. (See the sidebar.)
Establish a Team of Professionals
- An Attorney will help you understand how to protect your money while planning for your current and future lifestyle. An attorney can help you prepare a will and structure an estate plan or trust accounts that provide for and protect the financial future you envision.
- A Certified Public Accountant will advise you about the tax obligations related to your windfall and how they may impact your estate planning. Federal and state taxes are a significant consideration in any financial plan, and many states have different tax requirements.
- A Certified Financial Planner serves as the quarterback of your professional finance team. Your planner will review your existing financial situation and help you assess your goals for spending, saving and investing. Your planner also will help you prioritize your needs and determine who will receive your funds. They will help you create a financial plan, which will outline short- and long-term goals while factoring in the outlook for inflation and investment market volatility over the next 30, 40 or 50 years, depending on your life expectancy.
Determine Your Priorities
After you and your financial team have determined the net amount of your windfall (after accounting for taxes and fees), you should prioritize how to allocate the remainder to meet your financial needs and goals, says Stephanie McElheny, manager of financial planning with PNC Investments, Member FINRA and SIPC.
- Emergency Reserve – If you have not already done so, set aside at least three to six months’ worth of expenses in cash to cover any unforeseen circumstances.
- Debt – Pay off all high-interest debt and if a sizeable amount of your windfall remains, consider paying off any remaining debt.
- Retirement Planning – Invest as much money as is deemed necessary by your team of professionals to fund your retirement and legacy goals.
- Current and Future Obligations– Any remaining money can be used to meet your daily living expenses or put aside for expected future purchases. Your financial planner can assist you in creating a budget, which should be reviewed annually and adjusted as needed.
Most importantly, do not deprive yourself. After you have met all other obligations feel free to splurge a bit on that dream vacation or new car. And most importantly, enjoy your new wealth!
PNC Investments financial advisors can help you develop a financial plan »
Stephanie McElheny says it’s important to gather
a team of professionals and establish a financial plan when dealing with large windfalls, especially if they are sudden or unexpected.
What About My Day Job?
Often, quitting a job is the first thing people consider when coming into a large sum of money. Depending on your windfall, it’s best not to give up your primary source of income until you have fully evaluated your financial needs. Obligations such as taxes, living expenses, and anticipated retirement spending will influence whether you can leave the workforce.
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