What to Do With a Windfall

Seven steps to follow if you find yourself with a jackpot, bonanza, or other lump sum

Perhaps your sum is from; an inheritance, the sale of a business or property, the cash up of an investment, a lottery win, sheer hard work (a bonus or commission), an insurance pay-out, or just a stroke of luck. Whatever the case, you’ll soon start thinking about what to do with the funds.

Any extra cash is always an opportunity to improve your financial situation, but many people waste such windfalls because they don't have a specific plan of what to do with it. Just because you have a sizeable lump sum doesn’t mean you’re guaranteed to stay wealthy...

A Guarantee for Wealth?

A financial windfall can feel like a dream come true. However, while these sudden surges in wealth can be life-changing, they don’t automatically guarantee long-term financial security. In fact, they can sometimes make things worse if you're not prepared. Here's why:

• Pre-existing Financial Stress: A windfall may not be enough to fix underlying financial problems. If you’re already struggling with debt or high living costs, the money might get absorbed quickly into these existing pressures. This doesn’t necessarily provide lasting relief, and you could find yourself in the same situation once the windfall runs out. Addressing financial stress before receiving a large sum can make a huge difference.
• Failure to Change Old Habits: A windfall can offer a fresh start, but only if you're willing to change your old financial habits. If you tend to overspend or fail to save, a large sum of money can quickly disappear. To truly benefit from the windfall, focus on developing better habits, such as budgeting, saving, and investing. Without this shift, the money might just provide temporary comfort before the cycle repeats.
• Psychological Factors, False Sense of Security & Splurging: Sudden wealth can lead to overconfidence and a false sense of security. People may feel they can spend more freely or make impulsive purchases like luxury items, believing the money will last. Unfortunately, these habits can drain funds quickly, leaving little for long-term security. It’s important to resist the urge to splurge and focus on setting aside money for the future.
• Lack of Financial Literacy: Without a solid understanding of personal finance, a windfall can be mismanaged. People may make poor investment choices or fail to consider taxes, leading to financial loss. To make the most of your windfall, it’s essential to invest time in financial education. Seeking advice from financial experts, including the team here at Become Wealth, can help ensure your money works for you in the long term.

Here are the top seven things to consider when you get a windfall.

1. Pause, Get Used To Newfound Wealth

This is the most important step!

It doesn't matter where the funds came from: pausing for breath is nearly always a wise idea.

Sometimes funds that may come to us all at once (or easily, if it was a lotto win!) are the easiest to let slip through our fingers. After a flood of wealth, it can be tempting to make emotional decisions. This means it’s tempting to spend it all on things you don’t need or spend it trying to impress others.

We've all heard stories of lotto winners, professional athletes, famous entertainers, and others who rapidly became wealthy - then blew it all. There can be many reasons for this, though the root cause usually just boils down to one thing: their mindset didn't adjust to their new-found wealth.

Truly wealthy people have often learned many things the hard way, so they won't make common mistakes of "new money", which could include:

• Relying on financial or legal advice from close friends, family members, or colleagues - the wise and wealthy among us seek professionals instead.
• Great expectations. Especially with the current cost of living and housing, your big sum might not be as big as you really think! This means being realistic about your financial and other aspirations.
• Family matters. Issues such as divorce or expectations of support to relatives can all quickly erode your funds. Wealthy people take practical steps to manage the expectations of those around them and also protect themselves against relationship breakdown or other issues.

Even if your sum is from a well-deserved KiwiSaver withdrawal or sale of a business or investment property - or similar - still take stock and reflect. The best option may still be to “park” the funds for a few months while you mentally adjust to your newfound bank balance.

Just like anything financial, this depends on your individual situation too. For instance, if you’ve just lost your job and your windfall is a redundancy payment, then you’ll want to ensure you’re well-funded for a gap between roles, or perhaps able to fund retraining in a new area.

Fight the initial ‘urge to splurge’ and instead pause and think things through.

2. Spend a Little

After all, money is for spending at some point.

Keep five or so percent to treat yourself to a new fun toy, experience, or holiday. This will probably be money well spent. Even when you’re spending this sum, still think carefully about it, and if possible, wait for a sale or prices to drop before you buy.

Just ensure you don’t get carried away, as how you use the remaining ninety five percent is crucial…

3. Think About What You Really Want From Life

Goalsetting is key.

Achieving what you really want from life could include:

Buy a House or Repay the Mortgage

‍Obviously, this depends on how much money you’ve received, your stage of life, and what your goals are.

Fix Anything That’s Broken

‍Use your windfall to repair whatever is broken in your life.

1. Start with your own health. If you've been putting off a trip to the dentist or a minor medical procedure, take care of it. You might also consider investing in things like a gym membership, better food, or activities to improve your health and wellbeing. After all, what’s the point in money if you’re not healthy enough to enjoy it?
2. Do the same for your family.
3. Next, fix anything else you’ve been putting off – perhaps your car or the roof. Use this opportunity to patch up anything you might’ve been putting off

Invest It

Commonly, the best thing to do is take the remainder of a large windfall and invest it for growth. Bank accounts and investment property aren’t the only way to make your money work for you. There’s a huge range of investment options available to suit anyone. For many, this is the wisest move as it will enable you to achieve what you really want in life – perhaps a financially secure retirement, perhaps to provide passive income, or other major life goal.

When it comes to larger sums, diversification becomes more important, too. This spreads the risk and return, and is often overlooked when people have received a windfall.

4. Repay Bad Debts

Doing so will generally provide the greatest possible return on your investment (for example, a 20 percent return if your credit cards charge you 20 percent). It'll also free up cash flow; if you pay off a card with a $50 minimum monthly payment, that's $50 extra you'll have available each month. Most of all, repaying debt will relieve the psychological weight you've been carrying for so long.

Don't underestimate the feeling of freedom that comes from no longer having money owing.

5. Talk to a Pro

As mentioned previously, we’ve all heard stories of lotto winners and sporting stars who go from boom to bust in just a few short years – a financial adviser can help you avoid this situation. This is especially true if you’ve never handled as much money as you now have.

A financial adviser, including our team, can help you goal set, explain your choices to achieve those goals, consider things like tax efficiency, and might be able to access investments you can’t directly.

6. Ensure You Understand Any Tax Implications

Together with talking to a professional financial adviser, a tax adviser or accountant may be well worth it too. This is because you might owe taxes on your windfall – this will be dependent on the source. If you forget this and spend the money, you could end up in a tough position when you later find out you owe the tax collectors at the IRD.

If needed, you might need to set aside enough to pay your taxes before you do anything else.

7. Update Your Estate Plan

If you already have an estate plan, it makes sense to revisit it periodically anyway, but it nearly certainly needs updating to reflect any changes required after receiving a windfall.

An estate plan ensures your money and assets are managed according to your wishes upon your death or incapacitation. When you pass away, a detailed estate plan should make the wealth distribution process much less upsetting for your grieving beneficiaries as well.

The Bottom Line: What to Do With a Lump Sum

If you find yourself with a cash windfall, wanting to do something fun with it is natural. However, long-term thinking and careful management will help you turn a windfall into a long-term improvement in your standard of living.

To circle back to step number one, often the best thing to do is to simply take your time and not make any sudden moves. Put the money aside in a term deposit, locked away for a few months. You can use the time that the money is tied up in the term deposit to get used to your newfound financial position and formulate a plan to use it wisely.

Including that crucial first step, let’s recap the top seven things to do after you receive a windfall:

1. Pause first
2. Spend a little
3. Think about what you really want from life
4. Repay bad debts
5. Talk to a professional
6. Ensure you understand any tax implications
7. Update your estate plan

If you’d like to talk to a professional about anything explained here, please drop us a line to book your complimentary initial consultation, we’d love to help.