Suddenly coming into a windfall of cash can be exciting. But once the initial excitement wears off, you soon realize — you're not sure how to manage this new wealth. Some people respond to this lack of knowledge by either leaving the money in a low-interest savings account or simply spending it all. And neither of these options is ideal. If you manage a windfall properly, that money can transform your financial present and future. To that end, follow these wealth management tips for a windfall.
Spend a little but in a planned way.
There's no reason not to treat yourself a little bit. If you try not to spend any of the cash, this plan may actually backfire. In a moment of weakness, you may blow through too much. The best approach is to decide, early on, how much you are going to spend on enjoyable items and experiences and what those items and experiences are going to be. It's reasonable to spend between 5 and 10% of the total amount on luxurious purchases. This could be a vacation, a new ATV, some new sporting equipment, or anything else that satisfies you personally.
Pay off your debt.
You may assume you should invest the money rather than paying off debt, especially if your debt has a pretty low-interest rate. But there is something mentally freeing about paying off debt. It's wonderful to know that you own your car, and even your home, outright. So if your windfall allows you to do so, pay off any outstanding loans. Start with those that have the highest interest rate, and work your way down to lower-interest debt. If you want to leave some lower-interest debt unpaid so you have more to invest, that's an acceptable choice. But in most cases, once you pay off some debt, you'll feel really motivated to pay off more.
Invest in tax-advantaged retirement and school savings accounts.
When you do invest your windfall money, choose your investments wisely. If you have a child heading off to college one day, you may want to invest in a 539 plan, which will grow tax-free towards your child's tuition and school bills. Otherwise, you will want to invest in a tax-advantaged retirement plan, such as a Roth IRA. By the time you're ready to retire, you'll have a lot more money.
Follow the tips above to manage your windfall responsibly. Reach out to a wealth management planning professional to learn more.