Providing Financial Guidance For Life
We’ve all heard stories of people who receive vast fortunes only to squander away the entire sum. Without a plan, it’s easy to start spending with the intention to only spend a little but soon realize you’ve spent far more than you meant to. Whether it’s an inheritance, winning the lottery, or a large bonus from work, you’ll need to plan for how you’ll handle the money. We can help.
If you feel overwhelmed by all the choices, consider working with a financial advisor.
Depending on the current state of your finances and how large your windfall is, you may need to work with a professional, or even multiple professionals, to create your plan. A financial advisor can help you create a plan with the windfall in the context of your larger financial plan. A financial advisor can also help you adjust your existing financial plan if the windfall effects your time horizon and/or risk tolerance. You may also want to work with a tax planning specialist or an estate planning attorney.
Avoid Impulse Spending
It’s incredibly tempting to start spending money you didn’t expect to receive. Even normally responsible spenders can feel like a windfall is “bonus” money and therefore the normal rules don’t apply. This doesn’t mean you can’t spend any of your windfall, but don’t do anything right away. There are a lot of options and the number of choices can feel overwhelming.
Don’t make a decision simply because you feel the need to do something. Take the time to evaluate your options and make a plan that’s right for you.
Create A Plan
Creating a financial plan to responsibly handle your money can help provide you with peace of mind. Anything you choose to spend you can spend guilt-free, since it’s part of your plan. Any investments you make can be well thought out, instead of impulsive. When creating your plan, consider the current state of your finances and how you can help set yourself up for success in the future. How much should you spend? Save for retirement? Use to pay off debt? There are many factors to consider, and a well thought out plan will consider all of them.
Pay Off Debt
A great use for your windfall, or part of your windfall, can be to pay off debt. But this isn’t always the case, since not all debt is created equal. It’s almost always a good idea to pay off high-interest credit card debt, but paying off low interest debt, such as your mortgage, isn’t always the best financial choice in the long run.
Though there is risk involved, if you invest your money, you may earn more than you would save by paying off your mortgage. The right choice for you will depend on what type of debt you have and what you would be doing with the money if you weren’t paying off debt. For example, paying off your mortgage would almost certainly be a better long-term choice than spending that same amount of money on an extravagant vacation or a new car.
Give Some Away
When creating your plan, consider giving away ten percent. This isn’t about doing what’s “right”, though you may view that as an added benefit, but instead about the mental shift it creates. When you give away ten percent of your windfall, you prove to yourself that you’re not overly materialistic and that you have the ability to budget. It may also help you realize that even a large windfall can vanish surprisingly quickly. Finally, giving away ten percent may also make you happier, which means its money well spent.
Think About Taxes
Most windfalls come with some tax implications. That’s why when you create your plan, it’s necessary to keep taxes in mind. Exactly what the tax implications are will depend upon the amount of money and how you received it. Depending on the source, it may or may not count toward your taxable income. Larger sums often come with more complex tax implications. Consider working with a tax professional to help you make sure you’re taking advantage of any available tax strategies.
You’ve unexpectedly received a large sum of money. Don’t go broke by using it too quickly. Instead create a plan that allows you to invest and responsibly spend your money. For more personalized advice, speak with a financial advisor at Modern Family Account Management today.
