What You Should Know About Windfalls Even if You Didn’t Win the Lottery
Someone just got crazy rich. The $1.5 billion Mega Millions jackpot went to one lucky winner in South Carolina on Tuesday night.
According to Mega Millions, 36 other tickets matched five numbers for a prize worth $1 million each.
We all dream of matching numbers on that lottery ticket or a giant check showing up at our doors. We tell ourselves that a sudden windfall of $X would solve all our problems.
But would it?
If you try hard enough, you can probably think of someone you know who came into some sudden money and blew it all in just a year or two. I know I can.
It even happens to the big winners, like David Lee Edwards. He won $27 million with a Powerball lottery ticket in 2001. Thanks to lavish living and drug use, he was broke and living in a storage unit by 2006.
Think about it: That’s $27 million in just five years.
Unfortunately, it’s an all-too-common tale. The sad fact is that many people end up in worse shape after receiving sudden money than they were in before. They simply don’t know what to do with a windfall to make it a blessing and not a curse.
Let’s look at some of the basics, so you know what to do if some unexpected money comes your way.
What Is a Windfall?
The traditional definition of a windfall refers to apples or other fruit that are blown off of trees when they’re ripe. Easy pickings for the passerby.
However, the more modern definition of a windfall is an “unexpected, unearned gain or advantage.”
We’re talking about free money here, people.
Just where does this free money come from?
Of course, we think of things like the lottery first. And yeah, that most certainly counts as a windfall. But there are other sources of monetary windfalls that are far more common.
- Personal injury or other insurance settlements
- Life insurance settlements
- Retirement lump sums
- Tax refunds
There is no set amount of money that’s defined as a windfall. For most of us, finding $5 in the pocket of our jeans as we do laundry probably wouldn’t count — though it may make our day!
An easy way to think about it is this: Could this new money seriously affect your life for a significant period of time? The answer won’t be the same for every person or family.
What to Do With a Windfall Under $10,000
Let’s be real. The most likely scenario in which you come into a windfall of extra money isn’t going to be a lottery jackpot. It will be an unexpected tax return, a year-end bonus at work or possibly a small inheritance.
While this won’t make you rich, it can certainly help out your financial situation if you let it.
Sure, a $5,000 bonus could help you install a killer home theater system in your house, but is that really the best use for it?
Do you have emergency savings? If not, setting aside at least some of your windfall for that is a super-smart way to use the money. In a perfect world, you should have a large enough emergency fund to cover your basic bills and needs for three to six months.
Other smart moves for your new money could be paying off credit card debt, investing it in a home upgrade project or putting it toward your retirement.
If that seems too difficult, try being responsible with at least half of the money and having fun with the rest. We’re all human, right?
What to Do With a $10,000 to $99,999 Windfall
Nice! Maybe you scored big on a scratch-off lottery ticket or received a nice insurance settlement. A chunk of cash in the five-figure range can definitely be a boost.
But don’t quit your job. Even at the highest end of this scale, you’re not set for life. Not even close. Trust Allison Cintins, who squandered away a $66,000 inheritance in about four years and added $7,000 in credit card debt.
The first thing to remember is you don’t have to do anything right away.
Breathe. Don’t spend the money before you have it.
Susan Bradley, author of “Sudden Money: Managing a Financial Windfall,” calls this the “decision-free zone period.”
“The decision-free zone period should be used to find out what your choices are and to think about what you want to do with your money,” she wrote.
So make a plan. While this kind of money may seem like a fortune, it’s not. However, it can be life-changing in a smaller way. When financial guru Dave Ramsey was asked what a family should do with a $100,000 inheritance, he said, “Your first goal is to be debt-free except the house and have an emergency fund of three to six months of expenses.”
Just think about how much extra income you would have if you weren’t paying off a student loan, car loan and those old credit card bills. Start there, and then if you have any left over, think about investing.
You Got a $100,000 to $999,999 Windfall. Now What?
Congratulations! This is serious money.
Coming across a six-figure windfall can be a life changer. Again, you’re probably not set for life, so don’t storm into your boss’s office just yet.
In your mind, this may seem like a nearly endless amount of money. It isn’t.
However, it is enough money to possibly pay off your student loans, mortgage and credit card debt, or start a fantastic retirement fund. At this level, you shouldn’t go it alone. Finding the right financial planner to help you make some of these decisions is crucial.
“The right planner can minimize your chances of blowing the opportunity your money presents,” Bradley wrote.
Make sure to speak candidly with your financial planner about what you want out of life. Seriously, if a trip to Italy’s wine country is on your bucket list, you can make it happen with this windfall without destroying investment opportunities.
If you’re tired of driving a car from the 1990s and want an upgrade, go for it. Just be reasonable. You don’t suddenly need a top-of-the-line Mercedes-Benz or a Tesla.
Enjoy your new gains, but run it by your financial planner first.
Just because you want to make this money last and work for you doesn’t mean you can’t treat yourself a little.
How to Handle a Windfall of More Than $1 Million
Jackpot! Now this is a bottomless pit of glorious money!
Sorry. No again. Even multimillionaires can go broke in a hurry if they’re not careful. The internet is full of stories of people who received big paydays through work or luck and lost it all.
That’s the bad news. The good news is that this kind of a windfall should, at the very least, start to set you up for life — if you’re smart about it. There are success stories out there. A good financial planner and a lawyer can help you create a plan and understand your rights. Understanding your taxes and making smart investments could set you up for life.
Then, brace yourself: Family, friends and even complete strangers will want a piece of your newfound money. Every salesperson will to try to convince you that you need a yacht or multiple properties. This is where your team of financial pros comes in. If you want to help your family out or splurge on a few items, that’s fine.
“Do your fantasy spending on paper first,” Bradley wrote. “You may find that you really don’t want all the things on the list once the exuberance wears off.”
Are you seeing the pattern here? Patience. Don’t make rash decisions the moment you receive a windfall. Take your time. If you’re married, get on the same page as your spouse. You don’t want the blessing of new money to ruin a good thing.
If you really want to make your money last, consider living off interest alone. If you invest $1 million and can get a 4% return on it, you’re looking at $40,000 per year. OK, you won’t live large, but if you continue to work and add that interest to your salary, you’ll probably do pretty well.
Consider that $1 million your seed money. It can’t grow if you deplete the seed.
If you just won $1.5 billion in the Mega Millions, you should be able to live very comfortably off a fraction of that interest.
With patience and a smart approach, your new windfall can make your life better, not worse. A rich Penny Hoarder just has more pennies to watch, and that’s OK.
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can’t personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.
Tyler Omoth is a senior writer at The Penny Hoarder who loves soaking up the sun and finding creative ways to help others. Despite the challenges, he’d be willing to win a lotto jackpot. Catch him on Twitter at @Tyomoth.