Surprise! You Just Received a Financial Windfall. Now What?

These days, a Powerball or Mega Millions jackpot must be over $4 billion to make it worth the near-certain loss. That’s rare.

But when it does happen, and I spend a few bucks on it, there’s that fluttery feeling in the pit of the stomach. If it does happen and you win, do you know what you’d do with those billions? I don’t. 

But I do know that I’d wait a while, avoiding rash decisions, and that’s at least as true if the windfall was ‘only’ hundreds of thousands or millions where the risk of running out is greater than if it’s billions.

If there’s the remotest chance you’d get a large windfall, you should explore now how you’d need to think of it, what you should do, and most importantly, what you should avoid doing. This is best done before a sudden money situation arises and causes euphoria that leads to poor choices. That way, the windfall would serve you and your family over the long haul.

What Are the Most Likely Sources of a Financial Windfall?

First, let’s define “financial windfall.”

To me, it means a life-changing sum of money, say 2 to 5 or more times your annual income. 

If you’re already conscientious enough to set aside 20% of your income for retirement, such a windfall would be equivalent to the amount you’d normally invest over 10-25 years. If you set aside 10%, it’s the equivalent of 20-50 years of investments!

If you already have 10× your annual income set aside, an extra 5×, managed well, could let you retire.

Here are some possible sources for such a large financial windfall (that are far more likely than winning the lottery):

• An insurance payout following a bad accident (I know someone to whom this happened).
• Exercising and liquidating options or Restricted Stock Units (RSUs) received from your employer (I know someone else to whom this happened).
• Being one of the first employees or investors in a “unicorn” startup where your small stake is worth millions once the company goes public (think Microsoft, Google, PayPal, Walmart, Berkshire Hathaway, etc.).
• Proceeds from the sale of a successful business.
• Selling a highly appreciated home and moving into a rental.
• Receiving a lump sum from a retirement plan in place of monthly payments.
• Receiving a large bequest.
• Buying speculative cryptocurrencies or meme stocks and one of them “goes to the moon” (think Gamestop stock when Redditors ‘short-squeezed’ Wall Street or purchasing Bitcoin when it was worth under a penny).

If you’re the beneficiary of such a windfall, ask yourself:

1. How should I approach my changed circumstances?
2. What should I avoid doing?
3. What should I do first?
4. What should I do next?
5. How do I ensure the money makes me happier?

I asked these questions of several financial pros:

• Scot Johnson, Principal & Chief Investment Officer at Adell, Harriman & Carpenter, Inc.
• Daniel Masuda Lehrman, Founder and Lead Advisor, Masuda Lehrman Wealth
• Omar Morillo, Founder of Imperio Wealth Advisors
• Alison Roth, Financial Advisor at AdvicePeriod
• Arielle Tucker, Founder, Connected Financial Planning

Here are their suggestions…

How to Approach Your Sudden Wealth

When you work for your money, and especially if the amount and timing are what you expect, you aren’t likely to be thrown into emotional turmoil.

This is when you’re most likely to maintain any long-term plan you’ve set in place.

It’s when the amount is massively more than you expect, and it comes suddenly that it’s almost certain to trigger strong emotions. Emotions like euphoria, elation, and possibly anxiety. You may also feel a strong urge to throw caution to the wind and spend and/or give out a lot of money.

When you haven’t worked for the windfall, it can too readily become a case of ‘easy come easy go.’

Both spending on things you couldn’t previously afford and giving to charity or friends and family in need can feel good. But you have to avoid giving in to these urges to such an extent that you risk running through the windfall without achieving important financial goals and priorities such as gaining long-term financial independence for you and your family.

As Tucker says, “When faced with a significant financial windfall, individuals must take a step back and assess their overall financial picture. I advise my clients to approach their newfound wealth with caution and to consider their long-term financial goals.”

Lehrman agrees, “The first and most important piece of advice I’d give to someone who receives a life-changing windfall is to take a deep breath and avoid making any big decisions until they’ve had enough time to process their new financial situation.”

What’s enough time?

That depends on your personality, your prior circumstances, and the amount you just received. It could be weeks, months, or even years until you feel fully grounded again. It’s not unreasonable to seek support from a psychological professional to make the process easier and quicker.

 “I emphasize to clients the importance of addressing the emotional impacts of sudden wealth by seeking support from both financial and psychological professionals to manage this life-changing event effectively,” says Morillo.

By taking the time to ground yourself, you’re more likely to make choices that work for you in both the short and long term. For example, buying an expensive home or car, going on a long luxury vacation, and even quitting your job may or may not be the right decision for you.

The only way to know is to wait until you’re in the right frame of mind, make a comprehensive plan for your newfound wealth, and assess whether those decisions align with your new plan.

Tucker cautions, “Above all, I advise individuals to approach their windfall with a sense of responsibility and mindfulness. Take the time to educate yourself about various financial options and seek professional guidance when needed. Remember that wealth is not just about money—it’s about achieving financial security and peace of mind for yourself and your loved ones.”

What to Avoid Doing With Your Financial Windfall

It’s almost a cliché, but if word gets out that you receive a huge windfall, it seems a flood of relatives you never even knew you had, friends, colleagues, acquaintances, charities, and even strangers will likely try to get you to share some of that wealth with them.

Giving in to your urge to help all of them risks giving more than you can afford to, potentially frittering away the windfall and possibly even falling into debt if you didn’t account for the taxes you may owe. You also risk becoming entangled in money disputes.

Again, giving to some of these people and organizations may or may not be a good idea. The point is to try to avoid such pressure and only gift the ones you feel most moved to give to and ensure the gifted amounts fit within your overall financial plan.

If nothing else, taking the time to craft such a plan will allow you some time to breathe and relax, which improves the odds of making the right decisions.

Morillo again, “I caution clients against making impulsive financial decisions and stress the importance of fully understanding the implications of each investment.”

Tucker cautions, “One common mistake I see people make after receiving a windfall is overspending or making impulsive financial decisions. It’s essential to avoid lifestyle inflation and to stick to a disciplined financial strategy. Additionally, be wary of unsolicited financial advice and always verify the credentials of anyone offering financial guidance.”

What to Do First With Your New Wealth

The best way to avoid pressure to give away large portions of your windfall is to keep it quiet, at least until you have a plan in place.

Part of that plan may well be to choose who and what causes you want to support, with how much money, and using what structure. For example, you could set up a charitable trust that allows you to gift to causes you care about, and do so in a sustainable, tax-efficient way.

Also, not sharing too many details too broadly will minimize the effect your newfound wealth may have on your existing relationships with friends and family.

Until you have a plan on how you’ll deploy the money, put it in a safe account such as a high-yield savings account, certificate of deposit (CD), or money market account. To make things even safer, limit the amount you put into each vehicle so you stay under the relevant Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) insurance limits.

This will ensure your money is safe and earning at least some income while you research and implement your next steps. One critical step is figuring out how much you may owe in taxes. Depending on where you live and work, and where the windfall came from, you may owe the tax man as much as 50% of it. In addition, the income from your new wealth could bump you up into a higher tax bracket for your wages too.

Roth cautions, “When you receive a windfall, remember you may not have the full amount to work with – you may owe taxes, depending on the source and amount. After determining how much, if any, you’ll owe in taxes, either pay them or set the funds aside to pay them when you file your taxes.

If you’ve never dealt with similar amounts, you’d make better choices if you assemble a team of professionals who routinely help people with similar or higher levels of wealth.

Lehrman says, “It’s particularly important to prioritize assembling a team that includes a tax advisor, financial advisor, and estate planner to help you navigate the complexities of wealth management, and create a financial plan tailored to your unique circumstances that incorporates strategies for wealth preservation and risk management.”

Johnson agrees, “Work with advisors who’ll help you be a disciplined and prudent steward of your newfound wealth. An objective extra pair of eyes can help you establish a plan for how to handle that wealth and – as importantly – hold you to it.”

Such a team could include:

• A certified public accountant (CPA), especially one who specializes in tax planning. Such a CPA can advise you on how to minimize the taxes you have to pay over the short and long term.
• An attorney specializing in estate planning. Such an attorney can help you create or update crucial documents including your will, power of attorney, living trust, healthcare directive, etc. He or she can also help you appoint trustees and ensure the right beneficiaries are identified where needed.
• A Certified Financial Planner (CFP) can help you articulate your money-related values, goals, priorities, and fears. He or she can then use that information to craft a comprehensive financial plan that will guide your decisions regarding paying off debt, setting up an emergency fund, funding college for your kids and/or grandchildren, saving and investing for retirement, and budgeting for your needs and wants.
• A fiduciary investment advisor, which requires them to put your best interest ahead of their own (assuming your CFP isn’t well suited to cover this role too). This professional will help manage your portfolio. You can also research their background through, e.g., the Financial Industry Regulatory Authority (FINRA). Alternatively, you can hire a fee-based investment advisor to craft an allocation plan and then invest in low-cost index funds to match the desired allocation. In general, invest only in such assets that you can explain how they fit within your overall plan.

To find these, ask for referrals from family members, friends, and colleagues who work with qualified and trustworthy professionals. Alternatively, you can research online on find-an-advisor websites like Wealthtender, Fee Only Network, and/or look for online reviews of financial advisors and other professionals.

Once you have a short list of potential pros, interview them to find ones you feel comfortable with; who are transparent as to their services, fees, and certifications; and who listen to what you tell them you want (and more importantly, what you don’t want).

What to Do Next

Your comprehensive, professionally crafted financial plan will be your financial playbook.

Morillo shares, “I guide clients who recently acquired significant wealth to carefully reassess their financial goals to ensure their newfound wealth aligns with their life objectives. I advise prioritizing establishing asset protection structures, such as trusts and LLCs, and maximizing tax-efficient strategies, such as contributions to retirement accounts and charitable giving.”

Tucker adds, “When prioritizing financial goals after a windfall, I recommend focusing on three key areas: debt management, emergency savings, and long-term investments. Paying off high-interest debt can provide immediate financial relief while building an emergency fund ensures stability in case of unforeseen expenses. Finally, investing wisely for the future can help preserve and grow your newfound wealth over time.”

Roth says, “Allocate the after-tax dollars to your various goals based on priority. It’s not the same for everyone, but common examples start with paying off high-cost debt, filling your emergency fund, and working backward from there (e.g. retirement, college funding, travel, home purchase, etc.). 

Regarding retirement investing, you aren’t allowed to put any of your windfall into a retirement plan such as a 401(k), 403(b), 457(b), and/or IRA. However, there is a legal way around that up to a point.

When I sold my first home, after putting a down payment toward my next house, I had a good bit of money left over which wasn’t taxable (since the capital appreciation was below the $250k individual limit). While I couldn’t put any of the leftover cash directly into my 403(b), what I could do (and did) was use that money to cover my expenses, allowing me to increase my 403(b) contribution to the maximum allowed by the IRS. 

This way, I effectively took tax-free money and used it to cut taxes on my wages.

Next, consider investing in yourself through education, training to acquire or improve your skills, hiring a mentor or coach to help guide your course, enhancing your wellness by hiring a personal trainer and/or dietitian, etc. Warren Buffett, a.k.a. the Oracle of Omaha, is quoted as having said that investing in yourself is your best investment, especially when inflation soars.

If you want to give to family members or others, remember the well-known quote, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” Where possible, you may be able to help someone better by, e.g., supporting him or her in setting up a business rather than simply giving cash.

Finally, Roth admonishes, “It’s good to give each of your dollars a purpose, but don’t forget to carve out a piece to have some fun!”

Johnson agrees, to a point, “Treat yourself a little but establish a plan to live off the recurring cash flows that wealth can produce from dividend and interest income. Match up cash flow needs with cash arriving in your portfolio, whether it’s from income, bond maturities, or planned returns of capital.”

How to Ensure a Financial Windfall Makes You Happier

Always remember that accumulating money for its own sake won’t make you happy in the long term. 

Money is just a tool, albeit a powerful one, that helps you achieve your goals and priorities, providing more freedom, security, and choices. It’s what you do once you have money that can make you happier and more content or less so. 

Behavioral economists suggest that people who quit their jobs and lived an unproductive life of leisure were not as happy as those who used their money in service of activities they found meaningful, such as volunteering, social pursuits, travel, etc.

If you follow the above tips, you’ll have a far better chance of achieving your goals and priorities and being able to spend more money and time on things you find meaningful, increasing your long-term happiness and contentedness.

Have a Question to Ask a Financial Advisor?

When you’re uncertain about money matters, submit your question to Wealthtender, and it may be answered by a financial advisor in an upcoming article or in the Wealthtender Expert Answers Forum. 

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This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.