Create a timeline
When deciding what to do with a deal, Boudreaux recommends breaking your plan into three parts: now, soon, and later. During the “now” period, figure out what you really need to work with, including whether any of the deals are subject to taxes. Estates, for example, can be taxed in six states. Life insurance proceeds, except interest, are generally not taxed, house winnings may be, and lottery winnings are. Once you’ve figured out your net dollar amount, consider bolstering your financial health by paying off high-rate credit card balances and boosting your emergency fund.
In the “soon” stage, it’s time to develop a comprehensive financial plan for money, including an investment strategy and managing your other debts, such as the mortgage on your home. (Don’t rush to pay off that mortgage in the “now” phase, advises Jill Gianola, a financial planner in Columbus, Ohio. “Emotionally, it feels good,” she adds. purely financial, you’re better off not paying off your mortgage, investing and letting your money grow.”)
And the “later” part of the process? It’s about deciding on big plans like buying a vacation home, making big donations to charity or family, and updating your estate plan. “Give yourself time to make sure you’re happy with your decisions before you do anything,” McCoy says.
Get ready for the pleas
A windfall can bring friends or family members out of the woodwork, hat in hand, but planning for your own financial security should be your top priority. If someone asks for financial help that you’d rather not give, McCoy suggests this defense: First say you’ll think about it and promise to talk later, then practice your assertiveness skills to stay calm during the conversation. coming. “If a person really loves you,” she says, “they should be able to take no for an answer.” If you refuse a request, explain your reasons; people like to hear the “because,” McCoy says. And don’t feel guilty for not helping. “However you received the money, it’s up to you what happens,” she says. If you decide you want to help, you may find it rewarding. Studies have shown that spending money on others makes us happier than spending money on ourselves.
Build on what you have
If you already have a plan in place for retirement and other goals, don’t give up on it. Instead, see how this new money fits in. “If you thought you could never retire, an inheritance can make it possible,” says Boudreaux. “Or it could speed up the schedule or allow you to move into a recall career.” A cash injection can also fund smart adjustments to your plan, like allowing you to cover the taxes on converting from a traditional IRA to a fully tax-exempt Roth IRA or postponing applying for Social Security. “Delaying from 67 to 70 means a 24% increase in benefits for the rest of your life,” says Gianola.
Go easy on the market
If a windfall leaves you with a large sum of money to invest in the stock market, invest for the long term. “I’m not a big fan of investing everything on day one,” says Catherine Valega, a financial planner in Winchester, Massachusetts. Emotionally, it’s hard to risk a lot of money all at once. (As is the case with any time you invest, diversification reduces your risk of large losses; a broad-based mutual fund offers much more security than the shares of a handful of individual companies.) If you have feeling like a legacy has made you the custodian of the legacy, Gianola notes, “it can hurt more if you put the money into risky assets and lose it.”
Be intentional in your spending
If you want to reward yourself with some of your new money, give in to that impulse – within reason. “It’s the dessert, not the main course,” says Boudreaux. “Maybe take 10-20% of the money to spend on things.” Deploying the money in a way that honors the source can also help you feel better about a windfall, especially one that carries the emotional residue of an inheritance from a family member. You might want to take your family on vacation or donate money to a charity that was important to the person who left you the money. “Creating a memory increases that person’s long-term memory,” says Boudreaux. “It’s impactful and can be important.”