‘Massachusetts woman wins 3 quarters of a billion dollars in recent Powerball drawing’. Talk about a headline! The hype and hysteria that surrounds lottery drawings often garners loads of attention as winning such a large sum of money would clearly be life-altering. It’s exciting to think about ‘what would I do if I were to win?’
Now, the odds of actually hitting the Powerball jackpot are impossibly low – 1 in 292,201,338 to be exact. While selecting the correct 6-digit combination will likely never occur for much of the population, many of us may one day receive a windfall of another sort.
Windfalls can vary in source and amount, but examples are receiving an inheritance or gift from a loved one, life insurance proceeds, a legal settlement, a large increase in salary via new job or raise/bonus, newfound success in a business venture or the subsequent sale of said business.
Depending on the source of the windfall, you may be feeling a variety of emotions – from exuberance to grief – but the question begins to loom, “What should I do now?”. A windfall will likely change many aspects of your life, and considering how each action may affect other areas of your life is vital. It’s important to not make any drastic changes and in most cases, no immediate decisions must be made – so take your time and consider each alternative carefully.
In such cases, the services of a fee-only financial planner can be invaluable as the impact of a windfall on your financial situation should be evaluated comprehensively. Considerations will need to be made in terms of immediate tax impact and long-term tax planning, determining a sustainable spending rate, changes in estate planning needs, and the effects it may have on your investment strategy.
Other areas of your financial life will also be affected. Questions to ask yourself include:
- Do I currently have high interest rate debts outstanding, and if so, should I pay them off now?
- Do I have an emergency fund to cover 3-6 months of fixed ongoing expenses?
- Are there items I’ve wanted to purchase or repairs that need to be made?
- Does this sum of money alter what I’d like to do for a living or when I would like to retire (can I retire now)?
- What are the most appropriate types of savings vehicles to use to invest the funds?
- How does this windfall alter my long-term plan?
By creating a plan that incorporates all your goals and taking the time to evaluate the alternatives, risks and opportunities, you can move forward with confidence knowing that your windfall has been incorporated into your plan and you are on track to use the funds to further your journey to accomplishing your financial goals.
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