Windfall money, or the money shock that comes uninvited and unexpectedly.
So whether it is a large sum from inheritance or from bonus, from winning some gamble or by playing KBC or even the result of some smart estate planning, windfall has to be managed properly. Patience & Prudence are the two effective tools to handle a windfall.
Be it a small sum or a large one, working out what you are going to do with it will help you in the long run and also keep your fears and other emotions at bay. This is precisely the most important time to reach out to a financial expert.
Firstly, don’t take any action immediately! Tempted as much you may be to feel all in control, the wise move is not to move ahead without clear forethought and misuse the golden hen.
The four pointers you must consider –
Understand Tax Implications – There are various scenarios that can impact your tax liability. For example, if you have received the funds as a gift will have a different tax treatment than funds received as bonus or a lottery. You must consult a specialist before you even plan to do anything with the funds. You may have to shell as high as 40% on just the taxes.
Pay outstanding debts – This would be the biggest benefit of a windfall. Even in case of debt repayment, personal debt needs to be paid first. They usually have the highest interest rates and have the biggest impact on the consumer’s financial history and future. It usually has higher payments and is most beneficial when closed first.
Invest right – Gaining control over a huge sum of money comes with a lot of responsibilities because it can change your life in any direction. Don’t be in a hurry to jump into investing anywhere & everywhere. Speak to your advisor and understand what you are landing yourself into. You may have various goals and each goal may have a different time horizon. Your advisor will be able to suggest right asset allocation.
Of course you can enjoy, but not splurge – With the right plan in place, this factor will be looked after automatically. Therefore, to prevent the windfall amount to flow out of your hands like a waterfall, fix a certain percentage of it for your indulgences.