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A sudden windfall is a boon, giving you a quick financial boost you may not have expected. However, figuring out what to do with a large sum of money that arrives quickly isn’t always easy. There are numerous potential pathways, and figuring out which is best may be tricky. If you’re wondering what you should do with a sudden large sum of money, here are some options that are worth considering.
Before you do anything else, pause for a moment and breathe. A sudden windfall may come from an emotionally challenging situation, such as the death of a loved one that resulted in an inheritance, a lawsuit award or settlement after a traumatic event, or selling a business you molded over the course of years. In any of those cases, what you’re feeling now may not align with your state once the dust settles.
Since that’s the case, you want to stop and breathe before spending any of the money. That can prevent you from making emotional decisions, allowing you to wait until you can think logically about what to do with the windfall.
Another critical initial step after receiving a large sum of money is to speak with a tax professional. Depending on the source of the cash, the total amount, and other details, there could be tax implications that you need to prepare to navigate. If you don’t find out about them now, there’s a chance that you’ll spend money you should have held back for an upcoming tax payment.
Usually, a single appointment with a tax professional can ensure you understand what the windfall means from a tax perspective. Additionally, they can discuss the potential implications of using the money for specific purposes, allowing you to learn more about how decisions may impact your tax liability.
If you either don’t have an emergency fund or the one you have isn’t large enough to cover at least three months of living expenses, consider using the money to boost your emergency fund. That gives you a critical financial safety net, ensuring that an unexpected financial hardship doesn’t derail your life.
You may even want to go as far as six months of living expenses. Again, it’s a buffer against the unknown, allowing you to have a resource you can tap down the line should the need arise.
If you already have a solid emergency fund, consider making high-interest debt your primary target. Along with costing you money, carrying large quantities of high-interest debt – usually in the form of credit cards – can harm your credit score.
By paying it down as much as possible, you reduce a financial burden while improving your credit report. That makes it a win-win, particularly if you have financial goals that often come with new debt, such as buying a home.
Another smart step to take is to bolster your retirement savings if you don’t have much set aside. Even if you have access to a 401(k) at work, you can typically open an IRA. With an IRA, you can send some of the windfall – up to the annual contribution limit – to that account. Then, you’re going the extra mile to secure your financial future.
Just make sure to research contribution limits or speak with a retirement professional who can give you those details. That way, you can maximize your savings while doing things correctly.
If you’ve dreamed of home ownership and can reasonably afford a mortgage, but don’t have a down payment available, consider using some of that sudden large sum of money for a substantial down payment. As long as you put at least 20 percent down, you can avoid PMI. By going beyond that, you reduce your monthly payment and increase the amount of equity, both of which work in your favor.
Just make sure you don’t purchase more house than you can afford, both from a monthly payment and from a tax and maintenance perspective. The windfall may make more expensive homes seem more plausible on the surface. However, you need to keep the long-term picture in mind, particularly if the money you’ve recently acquired won’t necessarily last long.
If you already have a home, paying off the mortgage is a smart move. It eliminates a major monthly payment from your budget while also allowing you to avoid further interest. Plus, owning your home outright can make it easier to sell later, should the need arise.
Even if you can’t pay off your house, paying down the debt is a good idea. It lets you reduce the amount of interest you’ll pay and shorten the total repayment period, allowing you to clear the mortgage faster than you would otherwise. Plus, if you need to reduce the monthly payment, you could do so with a refinance, something that’s easier to pull off when the amount you owe is far below the fair market value.
For those who tackled everything above and still have money left (or don’t want to buy a home), opening a brokerage account and investing could be a wise decision. It creates opportunities for your money to grow without the restrictions associated with retirement accounts.
In some cases, you can tap a financial adviser through your bank or credit union, allowing you to get advice for free. Otherwise, consider finding one on your own, opting for a non-commission adviser whenever possible.
Then, focus on assets that come with low fees and built-in diversification. Both mutual funds and ETFs can be great starting points. Look for ones that align with your goals and risk tolerance, allowing you to reduce risk while ensuring your money has a chance to grow.
When you end up with a sudden large sum of money, give yourself permission to have a little bit of fun. Just make sure you do it responsibly. For example, depending on the amount of money, you might want to designate 1 to 10 percent as cash you can spend on something you’d enjoy.
Usually, it’s best to look at your broader financial picture first. Then, you can determine what percentage is reasonable based on your other goals and how committing to the points above would benefit you. That allows you to choose an amount that won’t feel irresponsible, all while giving you a bit of freedom.
Do you have any other tips that can help someone with a sudden large sum of money make wise financial choices? Have you ever ended up with a windfall and want to share your experience? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
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It’s important to invest in the things that have the most value in your life, as the results are often worth the time and effort that was spent. Here are three investments you can make for your home, yourself, and your loved ones.
Good health is an important investment for everyone, so ensure to keep yours and your family’s in the best state at all times. You can do this by going for regular checkups and ensuring that you never miss a scheduled appointment. Ensure that you’re up-to-date on all the necessary vaccinations as well, so that you don’t miss out on improved immunity. When your children come of age, start taking them for regular checkups both at the dentist and general health practitioner.
In the United States, more than four million people wear braces, with 25% of them being adults. This is an example of one treatment you or a family member may need. Never hesitate to seek treatment as soon as you’re aware that it’s necessary. This goes for you and your family, as everyone is affected in one way or another when one person in the family is unwell. With this in mind, work towards good health in unity and enjoy spending more time together in good health.
Your home, which is likely your biggest investment as far as your finances are concerned, should be well taken care of at all times. Be sure to maintain all the electrical appliances so they run efficiently and serve you for a long time. When you do this, you will get more service out of your appliances and systems, making this a worthwhile investment. You can take on the basic ones such as changing air and furnace filters yourself while leaving the more technical and complicated ones to professionals.
Things like septic tanks, which need to be cleaned once every three to five years, will be better left to an expert to handle. This is because they will have the right tools and know-how to deal with them and you may not. Electrical issues are another project which you must never attempt to take on yourself. Avoid risky situations but make sure that you have all your home’s systems working as well as they should.
Finally, celebrate the special people in your life at every opportunity you get. For instance, you should celebrate your mom and all other moms you know on Mother’s Day. To keep things simple, get flowers, on which $1.9 billion is spent every year on this holiday. You could pair the flowers you get her with a personalized gift that will have a special meaning for her. You could even gift her with a service if this is something you feel that you can do. From helping her with chores around the house to babysitting, the list of things you can do is endless.
For the other special people in your life, remember to celebrate anniversaries, birthdays, and other special days with them. Everyone loves being remembered and acknowledged on their special day. Even if you cannot spend a lot on gifts and parties, it’s the thought that counts at the end of the day. Show up and this in itself will create an amazing impression. Consider planning an experience if you don’t have the money for a material gift. Whenever you’re among loved ones, be present so that you can fully enjoy this time spent with them, and them as well.
These three investments are the main ones you can make for your family, yourself, and your home and finances in general. Keep them in mind and you will find that your life is a lot more fulfilling than it was before.
If you are a parent, you already know it’s important to plan for your children in case something happens to you. One way to do this is by transferring assets to them before you die and in your estate planning. This can be done in a number of ways, and each has its benefits. In this blog post, we will discuss the different options available to you and how each can help protect your children’s future.
Remember: Generational Wealth building isn’t just for parents: grandparents, aunties, and uncles can change the shape of the entire next generation.
There are many different ways to transfer assets to your children, and almost all of them require a lawyer and have tax implications. It is important to consult with an attorney as well as a tax planner, both to choose the transfer structure that is right for you and also to ensure that the documents are compliant with Federal and State property and tax law.
One way to transfer assets to your children before death is through a will. A will is a legal document that outlines how you would like your assets to be distributed after you die. A will doesn’t actually transfer ownership of your assets until after you die, but it can be used to specify exactly who should receive what.
If you have a will, it is important to keep it up-to-date as your life and circumstances change. You should also review it regularly with a family law attorney to make sure it still meets your needs.
One important note: a will is great for establishing your wishes for the distribution of your assets are followed, but it will not keep your estate out of probate. Probate is the legal process of distributing a person’s assets after they die, via the courts in your state. It can be time-consuming and expensive, if you have substantial or complex assets, so many people choose a trust.
A trust is an arrangement in which one person (the trustee) holds and manages property for another person (the beneficiary). It’s a critical part of estate planning. Transferring assets into a trust can help avoid probate because the trustee can distribute the assets according to your wishes without having to go through the court system.
Moving assets into a trust that can be managed by a trustee will give your children access to the assets when they reach a certain age while ensuring that the assets are managed responsibly.
One common type of trust is a living trust, which is created during your lifetime. You can name yourself the trustee, which gives you control over the assets during your lifetime. Then, when you die, the trust remains in force and the beneficiary can receive the assets without having to go through probate. You can even trigger the execution of your trust before you pass away.
This is a good option if you want to maintain control over the assets during your lifetime, but also want to avoid probate.
Most financial accounts and life insurance policies allow you to name a beneficiary. This means that the account or policy will be transferred to the named beneficiary upon your death, without having to go through probate. Having updated beneficiaries is the cheapest and easiest way to transfer assets such as retirement accounts, bank accounts, and life insurance policies.
It is important to review your beneficiaries regularly and update them as needed, especially after major life events such as marriage, divorce, birth, or death. This can be especially important for single parents and blended families.
Another way to transfer assets to your children before death is through a gift or by selling the asset to them for less than its fair market value.
The upside of this option is that you are still around to help them manage the asset. The downside is that lifetime transfers have serious tax implications that vary depending on the value of the asset and your state’s laws.
You can give $16,000 per year, per child (or any other recipient) without needing to file any tax forms or pay any tax. If you are married, you and your spouse can each give $16,000, for a total of $30,000 per child. More importantly, the current (2022) Federal gift tax lifetime limit is $12.06 million per person, and you can also double it if married. While it would require you to file a form, gifts of any size can be given to your children without owing any gift tax, as long as the total amount gifted during your lifetime does not exceed the $12.06 million limit.
You can also sell assets to your children for less than their fair market value. This is The most advanced move, absolutely requires a competent lawyer and tax planner, and is generally most appropriate for family businesses. Generally, this involves a contract in which you sell the asset to your children for an agreed-upon price that is less than the fair market value.
There are a few different ways to transfer assets to your children before death. The most common ways are through a trust, naming beneficiaries on financial accounts and insurance policies, or transferring the assets during your lifetime.
Each method has its benefits and drawbacks, so it is important to discuss your options with a family law attorney and tax professional to choose the option that best suits your family.
Claire Hunsaker, ChFC®, is a Chartered Financial Consultant featured in American Express, Forbes, Parents, Real Simple, and Insider. She offers free financial planning for single women through AskFlossie, where she is CEO. Claire holds an MBA from Stanford and is an IRS-certified Tax Preparer. She has 20 years of business and leadership experience and approaches money topics with real talk and real humor.
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