What to do when fortune favors you, making the most of an unexpected windfall

This article written by Ron Valpey originally appeared in the Winter 2015/2016 issue of Around Concord Magazine and is updated yearly to reflect accurate information.

What to do when fortune favors you. If an unexpected financial windfall has come your way – maybe it was the lottery, a lucky trip to Las Vegas or a beloved relative’s bequest – what to do?

One of the first questions to ask and answer is: will I owe taxes? In the case of any type of sizable winnings (generally more than $600) you likely will. If the funds were part of a legal settlement, the tax, if any, depends on the type of claim. If the money came from a relative, the tax depends on numerous variables. No matter the source of the windfall, it’s a good idea to consult a tax professional.

Once the tax question is answered, the tougher question may be: what to do next? If you won the mega millions jackpot and can fund financial independence, your biggest problem will likely be learning to say “no” but be careful too, more than seventy percent of all major windfalls are gone before their recipients, so spend carefully.

What if you have come into a generous lump sum but not mega millions, maybe $10,000 or $100,000 or half a million? Oh so many places for your new found wealth to go.

High on the list should be bad debt, anything owed to a loan shark or high interest debt on assets that are not going to grow in value: consumer goods, cars, furniture, electronics… If you have $10,000 of credit card debt at 18% and you make the industry standard minimum payment (interest plus 1% of principal) it will take 28.5 years to pay off the debt and the total interest and principal paid will equal $24,423.30.

At the other end of the spectrum is good debt: a mortgage, school loans or anything you financed that will hopefully return more value to you than you paid. But how much interest you are paying is key, low single digits is okay, higher is not. Take for example a mortgage payment, if you have a traditional 15 or 30 year mortgage and you financed or refinanced in the last few years your interest rate is likely around 3% or 4% and if your mortgage interest is tax deductible, even less. So while it’s nice to have your home or low interest student loans paid off, these debts might be better off further down the payoff list.

Higher on the list may be non-discretionary expenses, day-to-day expenses that are not current or manageable. If they are not, get the expenses current and set aside funds to help offset future expenses, especially if you are having trouble keeping up on an ongoing basis.

Short term savings; do you have an emergency fund? Planners typically recommend having three to six months of living expenses in cash but weigh how much you keep in cash with other resources that can be turned into cash and what your cash will earn, particularly when adjusted for inflation.

Long term savings; is your retirement fully funded, are you ready for the college tuition bill? A windfall could be a great opportunity to give you a jump on such funding. How much really depends on your unique situation, but the sooner you get your contributions working for you, the more the contributions will likely be worth when needed.

Are you charitably inclined or do you have friends or family you want to help? Donating to qualified charities feels good and may help tax-wise. For friends and family, anyone can give anyone else $14,000 per year (for 2017) under the annual gift tax exclusion and even more under the lifetime federal estate and gift tax exemption ($5.43 million as of 2017). Certain payments for education and medical expenses (but not insurance premiums) may also qualify as excludable gifts. Contributions to grandparent 529 college savings plans can count as excludable gifts and be a great way to help the grandkids pay for college.

And last but certainly not least, let’s not forget pure enjoyment – fun money! Even if your windfall is not enough to fund all of the preceding consider taking 10% or so and just plain spending it with reckless abandon. After all, you never know when you’ll receive another unexpected windfall and life’s too short not to have some fun.