A financial windfall is an unexpected, often substantial influx of money. These funds may come from various sources, such as an inheritance, the sale of real estate, the exercise of stock options, or even lottery winnings. While receiving a windfall is exciting, deciding what to do with a windfall when one comes your way can be challenging and stressful. In the best-case scenario, a windfall is met with a well-structured plan that helps secure long-term financial stability and maximizes the positive effects on long-term goals. Here are 10 ideas to help you create a plan that will make the most of your good fortune. 

1. Top Off Your Emergency Fund

Why does an emergency fund come first? 

One of your priorities after receiving a windfall should be ensuring you have a fully funded emergency fund to get by if you incur unexpected expenses or experience a disruption to your income. This is one of the first elements in building a solid financial foundation.  

How much should you keep on hand? 

For most people, setting aside three to six months’ worth of living expenses is a good place to start. If you have a higher-risk occupation or variable income, it may be wise to save more — enough to cover 12 months of expenses — to protect your financial stability during unpredictable periods. 

Where should you store it for easy access? 

Emergency fund money should be kept in a secure, easily accessible place such as a high-yield savings account or money market account. 

2. Pay Off Debt

What paying down debt unlocks 

High-interest debt, such as credit card balances, personal loans, high-interest auto loans, and some types of student loans, can significantly drain your cash flow and limit your ability to build wealth. Using a portion of your windfall to pay off high-interest debt can free up future income, allow you to accumulate more wealth over time, and generally improve your financial health.  

Two payoff strategies to consider 

Prioritizing debt with the highest interest rate first (the avalanche method) or paying off smaller balances to gain momentum (the snowball method) can both be effective strategies. 

3. Bolster Your Retirement Savings

Use the windfall to maximize annual contribution limits 

Maximizing contributions to your retirement portfolio is one of the best ways to secure your financial future. A number of account types, such as 401(k)s, 403(b)s, IRAs, and Roth IRAs, offer opportunities to accumulate wealth with the help of significant tax benefits. Contributions are limited to certain dollar amounts per year, and a windfall may allow you to contribute up to these maximum permitted amounts if you are not already reaching these levels.   

Keep your paycheck contributions high 

If retirement contributions end up consuming a significant portion of your paycheck, you can make up the difference by using a portion of your windfall to fund everyday expenses. 

Invest contributions with a long-term allocation 

Once contributions are made, be sure they are invested in a diversified, growth-oriented allocation to maximize the long-term benefits of these plans. If you are unsure how best to invest your funds, consider consulting with a qualified advisor. 

4. Prepare for Future Expenses

An emergency fund is used to hold dollars in reserve against unexpected expenses — the proverbial rainy day. In addition to preparing for the unexpected, a windfall may be used to prepare — often years ahead of time — for a number of predictable costs that may arise. Depending on the time frame, it may make sense to invest dollars set aside for these needs in suitable vehicles, to use additional forms of tax-advantaged accounts, or to leverage dollars through the use of insurance products.  

Common categories to plan for: 

• Healthcare Costs: Contributing to a health savings account (HSA), if eligible, can increase the value of your savings by allowing a deduction for contributions and the potential for tax-free growth.  

• Long-Term Care: Setting aside funds to cover these expenses or using part of a windfall to purchase long-term care insurance can protect your assets from the high cost of assisted living or nursing home care. A number of strategies may be used successfully in this area; more details can be found here. 

• Education Expenses: Contributing to a 529 education savings plan for your child(ren) or grandchild(ren) for future educational goals can ensure your family is prepared for tuition and other school-related expenses. 

5. Increase Your Protection

Reassess insurance coverage after a windfall  

After receiving a financial windfall, you may have more to protect than you did previously. While unlikely to occur, any number of possible events, from a home fire to a lawsuit to disability, can derail even the best-laid plans and consume vast quantities of wealth. Receipt of a windfall is an excellent time to revisit your full range of insurance and legal protections and, if necessary, increase or enhance your coverage and plans.  

Review and update your estate plan 

In most circumstances, it will also be a good idea to revisit your estate plans. Proper estate planning can protect your assets in the event of incapacity as well as ensure a secure and efficient transfer of wealth to your heirs.  

6. Maintain Your Property 

Preserve the value of your home and real estate assets 

If you own a home or multiple properties, these are likely among your most valuable assets. Using part of your windfall to complete any deferred maintenance or essential repairs can help preserve and enhance your property’s value. Making sure the roof and siding of your home are in good condition and replacing outdated wiring can help your home retain its value and reduce costlier surprise repairs down the road.  

Improve energy efficiency and update appliances 

Replacing older appliances, adding insulation, or making other improvements to the energy efficiency of your home will likewise improve the value of your property while also reducing your monthly utility costs.  

7. Improve Yourself

Investing in yourself can yield lifelong benefits. A windfall may provide the opportunity to advance your career through professional development, certifications, or additional education. Investing in your well-being — whether by improving your work-life balance, enhancing your health, or pursuing a constructive passion project — can also contribute to your long-term fulfillment and success. 

8. Start a Business

Use a windfall as capital for entrepreneurial goals 

For those with entrepreneurial aspirations, a windfall can serve as the seed money to launch a new business or grow an existing side hustle. This is an exciting use of your funds, but some caution is necessary for this to go well. If starting a new business, begin small. Conduct market research and develop a solid business plan before investing a significant portion of your funds.  

Ensure financial stability before leaving full-time employment 

If you are considering leaving a full-time job, ensure your business is financially sustainable and has growth potential before making the transition. Be aware that many businesses do not succeed in the long term, so be sure your basic needs are met before allocating dollars to a business goal. 

9. Give It Away

Support charitable causes that matter to you 

Sharing your good fortune with causes or organizations you care about can be a meaningful way to use your windfall.  

Consider tax-efficient giving strategies 

There are many tax-efficient ways to donate to charity. If you have charitable intentions but are not entirely sure about the organizations or causes you would like to support, a donor-advised fund allows you to set aside dollars and receive a tax deduction in the current year while deferring the granting of funds to specific organizations to a later date.  

Involve family in charitable decisions 

If you have children at home, consider involving them in the decision-making in order to instill charitable values and teach them about the causes your family supports. You can also consider making tax-efficient gifts to friends and family who are important to you. 

10. Do Something Fun

Remember the purpose of financial planning 

Financial advisors may easily be accused of never having any fun. We are constantly preaching to save more, spend less, and protect your resources. These are important goals, but so is pursuing the lifestyle and dreams that all this planning is designed to support.  

Pursue meaningful experiences or long-held dreams 

Anyone who has been a planner for long enough has seen dreams evaporate because someone’s health declines or they become disabled. All too often, life takes unexpected turns. 

Work with an advisor to balance enjoyment with long-term goals 

This item is last on the list but is most certainly not the least of the uses proposed here. If you have in mind a dream trip or purchase that a windfall places within your reach, the right advisor should be more than willing to find a way to fit this goal into your plans. 

Watch Out for Scams and Opportunistic ‘Friends’

Attracting unwanted attention 

While it’s natural to feel excitement after receiving a windfall, it’s also important to be vigilant. A sudden influx of money can attract unwanted attention. You may find long-lost friends, distant relatives, or even acquaintances reaching out with “too good to be true” investment ideas or stories about their financial troubles. This is a red flag. 

Don’t rush into any decisions 

When people pressure you into making quick financial decisions, it’s essential to step back and take your time. Scammers can disguise themselves as well-intentioned individuals, but rushing into financial decisions can lead to costly mistakes. Always exercise caution and consult with an advisor before making significant financial moves to ensure your decisions are well-informed and protect your financial well-being. 

The Last Word: On Taxes

Understand the potential tax implications of a financial windfall 

As a last word, receiving any large sum of money is likely to come with a tax liability, large or small, depending on the type and amount of the windfall you receive.  

Seek professional tax advice before receiving funds if possible: 

Obtaining professional tax advice is best done before any money changes hands if possible; there may be ways of structuring the receipt of your windfall that reduce or defer taxation in some circumstances.  

Avoid penalties by planning ahead for tax obligations 

Waiting until you file your tax return to obtain advice may result in penalties if you were not current with your tax liabilities during the year. It’s best to consult with a qualified tax professional or financial advisor early in the process to understand your obligations, explore tax strategies, and ensure you are not caught off guard by a large tax bill. 

Work with a financial advisor to develop a balanced plan for your windfall 

As this post makes clear, a financial windfall presents the recipient with a number of different opportunities. It may be difficult when thinking through your options to decide how best to use your funds. How do you decide between increasing security, providing for the future, and funding bucket list experiences? While this may not be easy, you don’t have to do it alone. An experienced, credentialed financial advisor can help you think through your priorities and develop a balanced plan that maximizes the impact of your funds. If you have received or are expecting to receive a windfall and would like to discuss your best next steps, please reach out to our team.