Smart strategies for managing a windfall

Don’t make any sudden decisions. Whether you’ve been enriched by an inheritance, a boom in business, the lottery, or something else, take your time before making big decisions you may later regret. For example, don’t quit your job or make large purchases without thinking through the consequences and looking at the big picture. Instead, study your options so you can feel confident about your next steps.

Build your emergency fund. Your windfall is an opportunity to shore up financial security. For that reason, a portion of your new-found wealth belongs in an emergency fund, particularly if yours has been underfunded. Experts recommend setting aside six months to one year of expenses to prepare for a downturn in financial circumstances. Hold this money in an account that’s liquid so you can readily access it. And, keep emergency funds separate from your regular checking account to avoid the temptation to dip into them.

Tackle debt. Debt is often the greatest threat to financial stability. If you’ve racked up unpaid balances, your windfall represents a great opportunity to reduce or eliminate them. The first order of business is to pay down your credit card or other high-interest debt. Doing so can drastically reduce your monthly expenses and improve your credit score in the process. Paying down low-interest mortgage debt may not be as high a priority, especially if you can offset mortgage interest with investment gains.

Invest in your future. Put your windfall to work to create financial stability now and in the future. Fund your retirement plan with a balanced portfolio aligned to your risk tolerance and time horizon. Diversify your holdings with a range of stocks and bonds. You might also consider alternative tangible assets such as property.

Plan your estate. A sudden windfall is a reminder that life can change in a heartbeat. Take this opportunity to create or update your will. Assign beneficiaries to your assets, including your life insurance policy. Consider creating a trust to pass your wealth to the next generation.

Spend wisely. Don’t let your good fortune cloud your judgment. Be discerning in your expenditures. A large infusion of cash may permit you to make long-desired purchases, change careers, or help family and friends, but perhaps not all at once. Ideally you will continue to maintain a household budget to prevent overspending.

Share your good fortune. If your changed financial status allows it, be generous with the people and organizations you care about. Philanthropy and charitable deeds contribute to health and well-being while also strengthening communities.

Talk to a tax professional. Unexpected cash can affect your tax bill. There may be strategies you can employ to lessen your tax liability. For example, you may be able to fund an individual retirement account (IRA) or a health savings account (HSA) to reduce taxable income for the year. Make sure you’re taking advantage of available deductions and credits that lower your tax bill.

Get guidance from a financial advisor. An experienced financial professional can help you in the happy circumstance of a financial windfall. Consult an advisor for advice on how to manage your good fortune for optimal results.

— Gregory Parsons, CFP®, CRPC® is a Financial Advisor with Kuttin Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, LLC. in Kaufman, TX.