Be Smart About a Windfall



Be Smart About a Windfall

By Alix Tucci

A financial windfall has just come your way. You hit your sales numbers and earned a bonus. Your commission check was larger than you expected. An inheritance or vesting or exercising stock options has just put some money in your pocket. Or maybe you’re no longer spending money on commuting and lunches.

Now what? Down the road, what can you do to ensure that you’re happy about the decisions you made about your windfall? How can you give yourself the gift of satisfaction instead of regret?

The answer is a two-fold strategy:

  • Understand the psychology of getting a windfall
  • Evaluate how the windfall can affect your overall financial plan and well-being

Understand, too, that unless you’re in difficult financial straits and need to use that windfall right away, there’s no urgency to making decisions. In fact, in many cases taking your time can lead to better long-term decisions.

The psychology of a windfall

Unexpected money feels differently from an expected sum. And if the money came from something unpleasant, such as a windfall inherited when a person close to you dies, the emotions can be complex.

First, recognize that receiving a large sum of money can be life changing, and you’ll probably need time to get used to the idea. Receiving that sum won’t instantly make you happier. In fact, if it’s enough money so that family or friends believe you should share some of it with them in one way or another, it may add stress.

Again, unless there’s a pressing need to spend some of that windfall, the financial possibilities today will be the same months from now. That gives you time to get used to the idea of having that money. There are many stories of people whose impulse spending left them worse off than before a financial windfall came their way.

The trap of mental accounting

It’s easy to spend a windfall several times over without realizing it.

Say, for example, you received a $10,000 year-end bonus at work. You go shopping, because you haven’t treated yourself in a long time and your closet hasn’t had anything new hanging in it in months. You and your partner go out for dinner a few times to places that would normally be out of your budget. You plan a nice vacation. (Well, after COVID-19.) You send your niece in college some money for books. Do a couple of things around the house, buy a guitar (you’ve always wanted to learn to play), join a fancy gym, because, “Hey, I just got 10 grand.”

And when the smoke clears you’ve spent much more than you received.

That’s human nature. But it doesn’t have to happen to you.

Step one: be true to yourself

Before spending a penny of your windfall, ask yourself, “Does this fit into who I am?” You know yourself, your lifestyle, and what makes you happy. A windfall may allow you to live a more comfortable lifestyle or satisfy a long-held aspiration. But living a lifestyle that isn’t you isn’t necessarily the key to happiness. If you normally wouldn’t spend lots of money on lavish dinners because you don’t enjoy it, don’t spend money on lavish dinners just to flaunt money.

Think of your windfall as an extra paycheck. If you received an extra paycheck, what would you do? An inheritance or cashing in stock options may not feel like a paycheck, but they are. If part of your paycheck was going into your vacation fund, maybe the windfall means it’s time to make an extra contribution (or maybe even plan that vacation).

Step two: fit your windfall into your plan

If you’ve been working with a financial planner, a windfall can help you achieve, or get closer to achieving, the goals that are already part of your financial plan. If your first goal was to pay off credit card debts, a windfall can help you partially or completely meet those goals. If your goals — pay off debt, save for retirement, fund your child’s college — exceed your windfall, you can set priorities and accelerate the process of meeting those goals.

If you don’t have a plan, it makes sense to put your windfall aside, maybe in a savings account, while you formulate a plan. Again, the money doesn’t have to burn a figurative hole in your pocket. You’ll be happier if you plan, then spend.

Step three: reassess your goals

If you’re fortunate enough to receive a windfall large enough to meet some or all of your financial goals, take some time, either alone or with your financial planner, to analyze and extend your goals. What are your logical next steps? If you’ve paid off debt, for example, how can you best use the money you’d formerly budgeted towards your debts?

Step four: treat yourself (a little)

If you use the bulk of your windfall to meet your financial goals, good for you! Reward yourself, even if it’s in a small way. One client decided that every time she paid off a credit card she’d buy herself a cake. A nice dinner with that special someone or a new pair of shoes are modest, but meaningful ways to pat yourself on the back.

Final thoughts

A dollar is always a dollar, no matter where it comes from. A dollar in your paycheck or from an inheritance or other windfall is still a dollar. No more, no less.

Be mindful of how you think. You have automatic processes in place already that help you navigate life, and being mindful of those will help you understand how to work better with yourself, through your normal financial journey as well as one that may include a financial windfall.

If you would like to learn more about financial windfalls, check out the recording of our Lunch & Learn on the topic.