How to Navigate Windfalls
August 14, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
Windfalls, while unexpected, can make your financial burden manageable. When you have a consistent salary, it is easy to factor in the effects of a windfall and place this money to help you reach your financial goals. With irregular income, this can become a little more tricky. Windfalls can provide confidence in your financial decisions regardless of your financial source.
What is a Windfall?
A windfall is an unexpected sum of money, good fortune, or financial gain, like a bonus, a commission, or any other income you weren’t expecting solely from your contractual salary.
How to Navigate Windfalls
Step #1: Take a Deep Breath
When receiving a windfall, stepping back and letting it sink in is vital. Don’t rush into financial decisions; discuss them with your loved ones for a few days. Establish a meeting with an uninvolved third party for financial consulting and advice before making any important financial decisions.
Step #2: Meet with an Uninvolved Party
Meeting with an uninvolved party removes any biases when discussing financial decisions. Understanding your allocation options and determining how this windfall can affect your net worth is essential. First, talk with a planner to determine if there are any payout options instead of solely a lump sum, which could help spread your windfall and decrease the likelihood of rushed financial decisions. Also, find somewhere safe to keep your funds before making any decisions, like a personal savings account or a separate account designated for these funds.
Smart Spending Options
Option 1: Prioritize Creating or Reinforcing an Emergency Fund
Setting aside money to help with unexpected challenges can increase your peace of mind and make you more confident about events you can’t control. Using windfall to aid your emergency fund can help you plan for these unexpected events.
Option 2: Pay Down High-Interest Debt First
Start listing out all of your debts and organize which are the highest priority. Typically, credit card debt holds the highest interest. Sort your debts out based on the method that works for you. Create a way to hold yourself accountable, whether by interest rate or amount.
Option 3: Build up your Savings for Retirement, Education, and Health
You can use this extra money to pay for student loans, add to your children’s college funds, add to your retirement account, or for insurance costs. These options can help you get ahead by saving for significant milestones in your lifetime.
In terms of college savings, consider a 529 college savings plan. For health, look into the health savings account, or HSA, which can help lower your tax bill.
Also, you can look into investments. Donate to charity, look into new homes, and invest in your further success. These decisions are great options to consider when working alongside a financial planner.
Step #3: Look into the Tax Implications
Work with a financial advisor to see if your windfall will affect what tax bracket you’re in. If your windfall is taxable, you can work with an advisor to minimize the impact of this additional taxable income.
Step #4: Revisit your Estate Plan
If you have an estate plan created, you likely will look at it yearly or when major “life events” happen. A windfall can be a significant life event, and it may be wise to look at your estate plan and see how this can affect it.
Step #5: Revise your Budget
If you don’t spend much of your windfall impulsively, it can help reduce monthly payments for credit cards, mortgages, and car payments, which could be helpful for month-to-month expenses.
Step #6: Consider Spending on Yourself
With this new windfall comes the opportunity to treat yourself. It’s essential to recognize the achievement of receiving a windfall. It likely took hard work and determination to get to the point of a windfall.
Overall
With windfalls, doing what’s best for you financially is essential. Whether saving, investing, or paying off debts, make the best decisions for you and your loved ones. Don’t rush into any major decisions. Be sure to work with a financial planner or advisor along the way. Complete View Financial can help you with your process; set up an initial meeting today.