Today I had a conversation with a friend who, unfortunately, recently lost her father to cancer. Unbeknownst to her her father had set up separate insurance policies for her sibling, for her, and for his wife. Each person received a substantial windfall from his untimely death.
Of course my friend would give the money back to have her father back. But what happens when you receive a sudden windfall? What do you do with this money? In some respects, it is like winning the lottery. What would you do if you won the lottery or gambling winnings or god forbid received a settlement or insurance from an accident or the death of a loved one.
As I was talking with my friend about what she planned to do with the money we were talking about some guidelines for dealing with this unexpected good fortune. With her blessing I am going to discuss some of the rules we think should go with a windfall.
Before we begin let me define what I think is a windfall. A financial windfall is not an extra hundred dollars. It isn’t even an extra $1000. I would qualify a windfall as at least 5 figures, potentially six figures. Depending on the windfall some of this advice might change because you might use all of the money up before getting to some of these other items. So here are some guidelines for a financial windfall.
- Initially, DO NOTHING. If you are lucky enough to get some good financial fortune I would suggest that you take at least a couple of weeks, if not few months, to do nothing. This is especially true if this money comes from a tragedy. You don’t want to make decisions when you are emotional and/or grieving. Take some time to deal with your emotions, your family. Give yourself some time to grieve. If you win the lottery or receive gambling winnings I still say DO NOTHING for at least a little bit. Process it. Then make some choices.
- How did you receive this money? I put this forward because depending on how you get it could impact how you want to spend it. For example, my friend received this money from her father’s death. From our conversations I know that he wouldn’t approve of her blowing it on junk and/or stuff. He would want her to be prudent with this money. I think that when you receive a windfall, particularly if it is from someone else that you should try to honor the wishes of what that person(s) would’ve wanted you to do.
- Determining monetary priorities. So you have this money now what do you do with it? Do you blow it on hookers and blow? Do you just squirrel it all away for a rainy day? What do you do? Depending on how much money you have will certainly determine some of these answers. Here is how I would prioritize the spending of any windfall:
- Pay off debt (e.g. student loans, credit cards, etc…possibly mortgage)
- Emergency fund (put some of this money away for a rainy day)
- Saving/Investing (you should use some of this money to contribute to a retirement account/brokerage account)
- Give. I think you should give some of the money away. That could be helping out a family member or donating to your favorite charity. Whatever you decide sharing with others is half the fun of money.
- Have some fun. You have received a windfall. If you have paid off your debt and put some money away there is nothing wrong at all with having a little fun. You can determine that. Perhaps it is a new car (as long as it is paid for), a trip of a lifetime, maybe small series of getaways, a new kitchen. Whatever. I think you should have some fun.
More Monetary Priority Details
So let me explain some of the money priorities I have above and I will use my friend as an example. She received a fairly significant windfall so she could/will do all of those items. If you only get $10000 you might just determine to put this in an emergency fund or pay off debt or invest. I don’t think you should just have fun. That should come 4th or 5th after these other items.
Debt. I would focus on any kind of consumer/student debt. That would be my priority. So if Mrs. ROB and I received a windfall tomorrow I would pay off our student loans/personal loan. I might not pay off the mortgage. Instead I could take the money that I was spending on this student loan debt and dedicate it to the mortgage. That way my money continues to be productive and I don’t have lifestyle inflation.
Emergency Fund. My friend noted she already had a little money put aside. I am not sure how much, but I recommended that she put about 6 months of expenses aside. She has a very secure job and is good at what she does, but you never know.
Investing. This is the topic we spent the most time on. She currently has the money with a financial adviser person who instructed her to contribute to a Roth IRA for this year and next year. I think that is an EXCELLENT idea. However, I actually thought of a different wrinkle. Roth IRA’s are great investments, but what I encouraged her to do because it is a substantial windfall is to set up account that is separate and call it a Roth IRA account. I would then fund that account for 10 years of contributions, which is $55000. I would have her open a Roth IRA make last year’s contribution and then set up monthly contributions. So every month she would automatically contribute to the ROTH IRA and meet her yearly contribution each year. This way she is investing and doing dollar cost averaging, which is essentially buying things over time. I encouraged that because if she invests it all at once it might go down and then up again. By doing it monthly she can buy things as they go down and up. Overtime it will make her more money.
Giving. Self-explanatory above.
Have Some Fun. This is probably the biggest conundrum my friend has. Her father was a very practical and prudent man, but also a fun guy. I told her I saw nothing wrong with taking 10% of this money and having some fun by taking a trip or going out. Whatever it is. Money is meant to have some fun with it. It is ok to share with others.
The Bottom Line: A financial windfall is something that many of us may experience in a lifetime. I am not sure if I will every get one, but I think the best thing is to WAIT initially. Then make decisions later. What do you think? Add or subtract anything?