Tips on how to manage an unexpected financial windfall.
It’s a scenario many of us only dream about — receiving an unexpected windfall of money. Who wouldn’t want to wake up one day to discover an extra hundred, thousand or more dollars heading straight for their bank account?
While it can be tempting to imagine all the things you’d do with a sudden influx of cash, creating a plan can help ensure that you’re using the proceeds to improve your financial situation. In the event that you do find yourself in this position, these tips can help you get the most out of your newfound wealth.
Take your time before making any financial decisions.
Chris Ward, Executive Vice President and Financial Advisor, Commerce Financial Advisors, and Kevin Casteel, CFP®, Financial Planner, Commerce Trust, agree that if you find yourself in this situation, the first step should be to avoid making any quick decisions. “You may have lots of plans in mind but start by taking a deep breath and don’t do anything,” says Casteel.
Let the amount and type of windfall guide your planning.
Financial windfalls can come in different forms and sizes, like an inheritance, an insurance payout, a work bonus, proceeds from selling a business or even a winning lottery ticket. In many cases, the amount and source of funds can guide your planning to help you make the most of your money.
“Smaller amounts, like a work bonus, can help you reach your short-term goals. But a larger, significant amount can help you reach long-term goals or change your life altogether,” says Casteel.
Take smart steps to manage a small to moderate windfall.
For situations like a work bonus or a larger-than-expected tax refund, Ward recommends depositing the money immediately. “The number one mistake I see in this type of situation is that most people don’t plan,” says Ward. “The money is already spent before it’s deposited.”
“Before spending any of the money, review your financial situation, including where you are now and where you’d like to be,” he says. He recommends asking yourself: What can this windfall do for me?
“Then you can create a spending plan based on your current finances and your goals, such as paying down debt, starting an emergency fund, buying a home, starting a business or saving for the future.”
As far as prioritizing where to spend the money, Ward says it depends on your age and your life stage. “It’s really situational. If you have student loans, auto loans or credit card debt, try to focus on paying those down, starting with the credit card debt,” he suggests.
“If you’re young and don’t have much debt, consider focusing on compound growth by investing your money for the long term,” Ward adds. “Or, if you’re debt-free and your retirement savings are on track, you might want to use the money to plan a trip you’ve always wanted to take.”
“Talking to a financial advisor can help you understand your options and develop a plan,” he adds.
Take smart steps to manage a large windfall.
For a larger, life-changing amount that significantly impacts your net worth, Casteel says that after you’ve taken that deep breath, the next step should be to assemble your team of professionals. “Having the right team in place can help you avoid making emotional or impulse decisions so you can better manage your money and make it last,” he says.
Types of experts you might reach out to can include a CPA, financial advisor, financial planner, fiduciary, estate planning attorney and portfolio manager or broker to help you understand your options.
“Most people aren’t equipped to handle a sudden surge of money by themselves,” adds Casteel. “There may be tax implications, but those can vary. For example, an inheritance shouldn’t have complex tax issues, because taxes are generally paid out of the estate. However, proceeds from the sale of a business or a Powerball win could trigger large tax implications, perhaps as much as half of the total amount. It’s important to understand the end transaction, which is something a CPA can help with.”
Sudden significant wealth can also lead to friends, relatives and charities reaching out to you and asking for money. Ward notes that one way to maintain control is to place the funds in a trust with guidelines on how the money can be used.
Commerce Bank can help.
A financial windfall can feel exciting and overwhelming at the same time. Regardless of the source or the amount, it’s a good idea to review your financial picture and understand your options so you can use the money to help you reach your dreams and goals.
Commerce Financial Advisors and the team at Commerce Trust offer experienced, objective insights and advice to help you stay focused on the things that matter most to you. Stop by a branch or contact us to learn more about how we can help you create a plan to use your windfall to create a stronger financial life today and in the future.
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DisclosuresThe opinions and other information in the commentary are provided as of June 8, 2022. This summary is intended to provide general information only, and may be of value to the reader and audience.
Commerce does not provide tax advice or legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents. This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified tax advisor or investment professional.
Commerce Trust is a division of Commerce Bank. Commerce Financial Advisors is the trade name used by Commerce Brokerage Services, Inc., a subsidiary of Commerce Bank.
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