By some unexpected twist of fate, you might have been the recipient of a windfall such as a huge commission from sales, separation package or maybe lottery winnings. Or you may be on your grandfather’s list of heirs to his colossal fortune.
Many people find themselves in the same situation, feeling euphoric as they wade through a pile of cash, only to squander the money in a matter of months. From zero to hero and back to zero. I bet you can name some sports stars, pop stars, and lottery winners who have filed for bankruptcy after their big break.
Not that we expect ourselves to become superstars or lottery winners soon, but we do not want to commit the same mistake in case we become recipients of a windfall. After all, a bonus at work or sales commission that comes in bulk is also a windfall.
Here are some tips on how not to blow that money and what to do with a windfall.
1. Don’t touch it yet
It’s a common mistake for people who receive an unexpected amount of money: they think of ways to spend it right away. The problem is when you start chipping away that money, you’ll start feeling comfortable about spending it until it is history.
This happens especially when you’re not used to looking at more digits in your checking account. You feel that you’re too rich now so it’s perfectly okay to spend some, and some more. The next thing you know you’re back to $17 and jingling coins in your pocket.
Relax, and don’t get too excited about it. Take a breather somewhere to avoid making any rush decisions. Let it sit for a while. When the feeling of euphoria wears off, you will have a better judgment to make practical financial decisions.
2. Break it down according to your goals
Hopefully, you have some goals in mind. A net worth, an emergency fund, or a house down payment perhaps. It all boils down to your priorities, but at least, have the following necessities first.
3-6 months’ worth of emergency fund
Having an emergency fund will, at least, give you peace of mind. You will not feel too scared about taking some risks by investing some amount. If you already have this money, then it’s time to turn to your debt.
Pay off debt
Pay off high-interest debts especially if we’re talking about big balances because the compounding interest will make a dent on your windfall. Pay everything at once and have that strong resolve to never get into big bad debts again.
If it’s a mortgage debt, it’s okay to leave it because the interests are generally very low. It would only make sense to use the money for your other goals.
Pay the necessary taxes
Forgetting to do so might just lead to more fines. You know what they say: don’t mess with the IRS. Your after-tax money is the actual money you have so paying your taxes should put things in a more realistic perspective.
3. Set limits on people who ask for loans
People will come to you for a loan or to egg on you throw a party or treats.
You, being the rich guy at the moment, will have no second thoughts because you are able to lend some cash, and you feel guilty if you don’t lend a helping hand.
It’s good to help out but there are friends who would prey on your good intentions and take advantage of you. Then come pay up time, they would avoid you like they were the ones who got scammed.
Avoid the complications of money and relationships by setting a clear limit on your charitable actions.
4. Enjoy a portion of it
It’s your money so why not? If you’re able to give to others, why not give to yourself? Take 5 or 10% off your money to spend on yourself. You need some enjoyment to avoid feeling deprived.
The feeling of deprivation will only make you compensate for it by spending more than you could have spent than if you had a specific budget for enjoyment.
5. Don’t make big life changes yet
A windfall of $300,000 won’t be enough if you have like 40 more years to live. Retiring won’t make sense. Don’t even think about it yet.
You might also be tempted to quit your job and start a business instead. Weigh the pros and cons of this action first. Do you have enough skills to survive the business world? How much is needed to put up that business? If you are betting the whole farm on it, you run the risk of losing everything and nothing to fall back on.