Stop! Don't Make These 6 Dumb Mistakes With Your Financial Windfall

By Kentin Waits on 2 February 2015 1 comment

Maybe your lottery numbers finally came in. Maybe a favorite aunt remembered you in her will. Heck, maybe one day while you were shootin' at some food, up through the ground came bubblin' crude — oil that is! Texas tea! (See also: 50 Smart Things to Do With Your Tax Refund)

Whatever the source, you're the lucky beneficiary of a financial windfall. Revel in it and protect your new-found wealth by avoiding these six dumb moves.

1. Act Impulsively

Receiving money unexpectedly is exciting, and it can send even normally down-to-earth folks straight into the stratosphere. In those dizzying weeks and months following a financial windfall, we're really not ourselves, so making big decisions during that time is usually a terrible idea. Instead of spending or investing immediately, take a time out. Collect yourself. Adjust to your new wealth for six months or a year and just let the cash sit in a money market account or CD. Remember, high emotion and sound decision-making usually don't mix.

2. Buy a New Car

Even if you're paying cash, there are many reasons to avoid buying a new car. Not only is it the most cliché thing you can do with a windfall, but it's also one of the quickest ways to lose roughly 25% on every dollar you spend. The minute you sign the paperwork and drive off the lot, that new car becomes used. Depreciation takes a quick and silent bite out of your new ride. Let someone else absorb that financial hit; buy a pre-owned late-model car that's still under warranty.

3. Loan Money to Friends and Family

Making loans to friends and family is a sure way to take the wind out of your financial windfall. Loans have a curious way of never getting repaid, and once your bank balance dwindles, hard feelings can set in and slowly erode relationships. If a loan is unavoidable, find out how to increase your chances of repayment without sacrificing the relationship. Better yet, if someone dear to you truly needs a hand up, simply make a one time cash gift with no repayment expectations.

4. Sink It All in Stocks

Certain stocks can be great investments — as part of a balanced and well-diversified portfolio. But for newly-minted investors flush from a financial windfall, a measured and balanced investing strategy just doesn't sound sexy. And while investing in the performance of individual companies might sometimes pay off over the long-term, it sets new investors up for a wild ride and turns what should be a well-considered and tactical process into a simple roll of the dice.

5. Pay Off Your Mortgage

Paying off our biggest expense can be immensely satisfying, but in an era of low interest rates, it may not be the most strategic decision. Think of it this way: If you have a 30-year fixed mortgage rate of 3.85%, but could realistically average 8.5% in a good mutual fund, wouldn't every extra dollar devoted to paying off your mortgage lose 4.65%? Of course, everyone's circumstance is different; factors like your age, the number of years remaining on your mortgage, the interest rate, and how long you plan on being in your home are important considerations. The point is this: Don't automatically assume that paying off your mortgage is the way to go.

6. Handle Everything Yourself

As wonderful as it is, money has a way of complicating things. Large financial windfalls often result in more complex tax issues, require much clearer estate planning, and demand a more active and engaged investment strategy in order to protect and grow wealth. It's important to be honest about the limits of your personal expertise and seek counsel from a professional. Explore hiring a CFP (Certified Financial Planner) for help and advice.

There you have it — six of the dumbest things you can do when life hands you a pile of cash tied with satin ribbon. If you run headlong into each one, chances are you'll outlive your windfall and resort to buying scratch-off lottery tickets to recapture the magic. If you avoid all or most of these mistakes, you can put that windfall to work and turn one good fortune into a lifetime of security and wealth.

Have you ever been the lucky recipient of a financial windfall? Do you have any regrets about how you managed the money?

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Guest's picture
Michele Kane

Get financially strained out