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How to handle a financial windfall

Congratulations. You won the lottery or got a bonus or an inheritance. Before you blow it all, Isabelle Wiemero advises you to put your windfall in perspective.

Joel Dresang: Isabelle, I want to pick your brain about windfalls. This is a time of year when people get bonuses and gifts. What do you do when you get money that you weren’t necessarily expecting, like winning the lottery?

Isabelle Wiemero: Well, when you come upon potentially unexpected money, especially a big chunk at one time, it can be so tempting to go out and start spending right away.

But this is really a time when you want to take a step back, take a breath and look at your entire financial plan. That way, you can make a plan with this new-found money and determine the best resources that are available to you.

Joel: So let’s include inheritances in the discussion. Ohio State University has done some research that shows that collectively Americans spend half of the money that they inherit. Thirty-five percent of people who get inheritances don’t feel any wealthier afterward. What does that tell you?

Isabelle: It’s so tempting to put your wants before your needs and go out and start spending right away, but there’s a lot of really important things to consider before you can allow yourself to start doing that.

First, you want to look at your emergency savings account. Is that balance where you feel comfortable with it being? If not, that’s a really good first place to look.

Also, looking at your debt is the next good step. Do you have a lot of student loans, car loans, mortgages? Sometimes it’s beneficial to pay that off. Other times it’s more beneficial to invest. That’s really an individual situation. You can work with someone to determine what’s best for you.

Joel: And you work with a lot of people talking about their long-term investment plans.

Isabelle: That’s right. Of course, it’s also a great time to look at your retirement savings. Are you already saving enough to reach your retirement goals? If not, or even if you are, it might be a good time to put another contribution to a retirement account.

Above and beyond that, is there anything in the near future that you’re going to need a lot of money for? Are you going to be buying a new house, a new car, paying for a wedding, paying for education? It might be a good time to set some of that aside to help you out in the next couple of years.

Joel: And of course, nothing is for nothing. An inheritance, winning the lottery, getting a bonus, those are all taxable events.

Isabelle: That’s right, and that’s why you want to really understand where this money is coming from that you’re getting.

For example, if you were to inherit an investment, it would be taxed differently, potentially, than if you were to get it as a gift. Going even further, if you were to inherit a bunch of different accounts all from the same person, it’s really likely that many of those accounts would be taxed differently when you go to take out the funds.

Going even further, you could have some limitations or requirements for when and how you can take withdrawals.

Joel: So Isabelle, you’re really a kill joy. I’m winning the lottery, and you’re telling me to worry about taxes and paying down debts. Shouldn’t I have some fun with it too?

Isabelle: When you come in a situation where you’re getting a new chunk of money, it’s really best to sit down with a professional and go through all of this and sort out your needs from your wants.

Learn more
Ask Money: Windfall – Hear how Bob Landaas responded to a Money Talk Podcast listener who had a question about receiving a $75,000 windfall.
8 Smart Ways to Handle a Financial Windfall, by The Alert Investor, sponsored by the Financial Industry Regulatory Authority

Once you’ve satisfied your needs, of course you can use some of the money to do some of those things that make you happy. Maybe you’re going to put it towards a family vacation, putting it towards a nice new shiny toy or even honoring the person who gave you the inheritance or the gift.

But when you do it this way, and you’re working with someone who can be objective with you, you can really develop a plan to accumulate wealth and even have a little fun, and not jeopardize your financial future.

Isabelle Wiemero is an investment advisor at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May and Jason Scuglik

(initially posted Dec. 21, 2015)

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