Don't waste a windfall

Key takeaways

  • New gains may afford you the opportunity to work toward financial goals and alleviate monetary stresses.
  • Once you have tax questions resolved, consider paying off debt. It's also important to avoid making any drastic spending changes. Focus on putting your assets to work for meeting long-term goals.
  • Use your new income to add to your financial goals.

Did you just find out you are receiving a large sum of money? Whatever situation led to your gain, it may afford you the opportunity to work toward financial goals and alleviate monetary stresses.

Whatever the source of your newfound wealth—winning the lottery, an inheritance, selling a business, signing a contract with the NFL—it's often an emotional experience, so it's important to take some time before making any major financial decisions.

When the time is right to move forward with putting your funds to use, consider this advice from Justin Waring, Investment Strategist for the UBS Wealth Management Chief Investment Office.

Resolve any tax liabilities

In the case of inheritances, most won't incur any federal taxes as long as the total value of the estate is below $11,180,000, per new federal tax laws. However, your state may have different rules. On the other hand, many other windfalls can have significant tax implications.

Work with a tax professional to resolve any outstanding tax liabilities first and if you have any concerns or doubts about any inheritance or windfall related taxes.

Consider paying off high-interest debt

Once you have tax questions resolved, consider paying off debt, Waring notes. While there are certain exceptions, in almost all cases you should "pay off credit cards and high interest debt first."

But having a windfall doesn't mean you should rush and pay off all your debt in all situations. You may want to consider putting a large chunk into a diversified portfolio of investments, which can help you work toward your financial goals.

Save and invest for your future

It's also important to avoid making any drastic spending changes. Focus on putting your assets to work for meeting long-term goals.

"One of the interesting things about windfalls is that behavioral biases may come into play. You might feel a desire to spend much of your windfall in your first year," Waring shares. "Purchasing things like new houses, cars and boats not only depletes your assets, it also commits you to a higher level of spending. You'll want to fill that new house with furniture, and throw big parties to make use of it; you'd be surprised how quickly this extra spending can offset the benefit of your one-time gain."

Figure out exactly how much spending your net worth can support. The worst-case scenario is that you quit your job, run out of funds and have been out of your career so long that your earning potential is diminished. "By definition, a windfall is something you are not going to get again," Waring stresses, "and you need to make sure it lasts."

Waring suggests investing most of your gain for the long term. "Put most of the capital away in an investment portfolio. Try to keep yourself living at the same level as before the windfall. That can vastly improve your chances of no depleting your savings."

Have your gains help you work toward your financial goals

Use your new income to add to your financial goals. "You now have a larger buffer. You may be able to take a little more risk in your portfolio without impacting your lifestyle," says Waring. "Start thinking about the other goals you have in life now that you have this new opportunity."

If you don't know where or how best to invest, a UBS financial advisor is ready to help.

Waring leaves us with this final tip: "Money can create opportunity. Use this money to do the things you couldn't afford to do before."

Disclosures