How to Prevent a Windfall Money Mistake
Another week goes by where my numbers didn’t match those of the Powerball. Of course the odds of winning large jackpots like that are quite slim, but a windfall of cash landing in your lap is not unheard of. Windfalls can come from many sources — a lottery winning, a bingo jackpot, a casino score, a work bonus, or an inheritance from a loved one. In many cases, people aren’t especially prepared for receiving a windfall, and as a result they end up making mistakes they live to regret both personally and financially. (See also: If You Won the Lottery, You Would...)
Even if you are not expecting a stranger to show up at your front door with an extra-large check, you should still contemplate the realities of having unexpected cash at your disposal — including tax refunds. Proper management of your personal finances means being prepared for what may come, so take some time to consider how you could use the extra cash responsibly. And who knows, maybe your windfall planning will lead to some insights about how to prioritize your spending and saving with your regular income.
Here is a starter guide on what you should consider when pre-planning your financial strategies involving a windfall of cash.
Eliminate Your Debts
Use your windfall responsibly and leave yourself with a clean slate, debt-wise. Credit card bills, back taxes, loans, and your mortgage debts should be prioritized first.
By eliminating the burdens of your existing debts, you are freeing up cash for your future. You are using your cash in a responsible way and solidifying your overall financial foundation. If there is not enough cash to meet all of your debt demands, make a plan to at least tackle any bills that are past due or charging you the highest interest rates or penalty fees.
Invest in Your Future
Monies remaining after your debts have been dealt with should be allocated towards your future no matter how old you are. Investment strategies should be explored and money can be used to fund your retirement portfolio. If your current retirement savings is at its beginning stages, consider paying a professional financial advisor for initial advice and guidance rather than risking your cash with faulty investments not relative to your financial situation.
Go Play
If your windfall paid all the bills and set your future financially on track, you can feel more confident about spending some of your cash on your "wants." This is the category many people will place as priority after a windfall and as a result, all the cash is gone with very little to show for it. Even when planning to play with some cash, you should prioritize your wants rather than let reckless spending lead to regret. Consider the things that mean the most to you and which will have a positive impact on your life and create memories that will last longer than the money.
Winners Beware
If you have ever watched a news report on the aftermath of a large lotto win, you’ll know that many lucky winners turned out to not be so lucky after all. The pressure that comes with having a lot of money suddenly often ends in heartbreak. There have been several well-known stories of lottery winners who have lost their money and even their lives. Supposed loved ones come out of the woodwork and endless calls from everyone asking for a piece of the pie can quickly turn good fortune into disaster. If you come into a large inheritance or win a large cash award, do nothing until you have secured an attorney and hired a reputable financial advisor.
Stick to your plans for prioritizing your money matters and always remember to be grateful for what you already have rather than focus on what you don’t have.
Have you made plans to spend any windfalls that may come your way? What are they?
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One thing I've always thought about if I were to win the lottery is taking the payout over 20 years. That way, if I screwed up and totally blew all the money, at least I'd have 19 more chances to avoid the same mistakes :)
I would thoughtfully apply it (or at least 99.9% of it!) to wherever we happen to be in our overall financial plans. Debt, savings, retirement, house, investment, with giving and reasonable fun things along the way. Since we have a decent idea of what our overall priorities are with money, my hope is that we would use any windfall accordingly!
I think a lot of the danger comes in not having much of a financial plan at all (I didn't for years) and then the temptation is huge to think only of short-term pleasure when unexpected money comes along. Also, I mismanaged some money from an inheritance when I turned 18 and I sincerely hope my regret from early mistakes would cause me to handle a second windfall with a lot more wisdom!