Ask the Readers: How to Handle a Windfall?

My grandmother passed away 7 years ago, and I inherited 22k. I put in in a high earning CD for the next 2 years (as I finished college). When it came up for renewal a second time, I took out 7k so I could buy a used car to use for driving to my first job. It covered the cost of the vehicle outright as well as the first year of insurance. The rest, I’ve kept in high earning CDs and is the base of a nestegg for buying a house, which my husband and I hope to do in the next 3 years. I’ve pulled from it once for a home-repair emergency, but we ‘reimbursed’ the account within and added the money back in on it’s next renewal.

Finally, an article that highlights a *responsible* windfall recipient.

Seriously, I get so tired of articles reporting how UNLUCKY lottery winners are, and how no one should ever wish for a windfall, because they’ll just come to ruin. The writer will follow the sad saga of 2 or 3 irresponsible windfall recipients, and claim that anyone and everyone who gets a large amount of money after not having much money before, will immediately go out and blow it on McMansions, hookers and blow, bringing themself to bankrupt ruin and wrecking their once-happy family.

But there are hundreds of people every day winning and inheriting huge amounts of money, and i seriously doubt every one of them is out squandering it. Thank you for highlighting Joan’s responsible response to her windfall.

I know if I ever got a large sum of money (HA), I’d set aside taxes first (duh), as well as read up myself on the subject of windfalls and perhaps also seek the help of a professional financial advisor in tandem.

I haven’t yet been lucky so far but I would be getting $500 as a referral bonus in December 09. Long time for it I know but I’m planning to put it all towards car loan

I did get $50 and $20 at different occasions though but small windfalls I put towards my grocery and fuel expenses.

My husband and I do have a loose “80/20″ rule; 80% of any windfall goes towards the common good with 20% being left for fun.
Since we don’t have any outstanding debt, the “common good” is can be our car fund or vacation fund or the purchase of some item (anything from car washes to a couch depending on the windfall size).
The remaining 20% is divided unevenly between the two of us – with the windfallee getting to pick how the dollars will be used (for individual or couple fun).

Similar to commenter christy above my wife and I received two moderate windfalls this year. The first was our tax return which we used to pay off her final school loan and purchase some big ticket items for our first child (due in late July!).

The second was my annual bonus from work. We used this to finish paying off both of our cars (one of which would have been done in 2 months anyways.)

As a couple we made the decision to use windfalls to reduce our debt until the only debt we have left is the mortgage. Then we will start allocating them differently to savings, mortgage, fun, etc. The only exception to this is that typically our tax return goes towards a nice vacation but this year we didn’t do that because of the baby on the way.

Talking about investing in financial instruments is fine and good, but talking about investing in EXPERIENCES is even better.

The Mrs. and I have both talked to our parents about what THEY want us to do with the windall when they pass.

We tell them that…
…at least 50% will go to their grandchildren’s education
…at least 25% will go towards our retirement plans,
…and we haven’t thought of the rest.

What were their ideas? They talked about trips or moments we could share together.

Currently, my parents give us a small amount every year. “Prepaying the inheritance,” they say. This is the amount we do fun things with. We take pictures to put in a photo album, and the kids give it to them on the my parent’s wedding anniversary. It could be an overnight stay at a nearby Waterpark, and one time we took a weekend in the hometown of my mother (taking pictures of her old house and the bakery her father ran, etc.). They weren’t trips to Jamaica, but small things.

My parents get to see the fruits of their labor, and know that any inheritance that’s left is icing on the cake.

They thought it was very important to LIVE the inheritance we were going to spend. My parents get so much enjoyment talking to their grandkids about the trips.

Oooh. I love these type of questions.

I actually had a friend of mine (just out of college) win 3 million dollars (this was take home, after taxes) in a state lottery a number of years ago. The smartest thing she did was to go to her family lawyer. He told her to put the money in the bank for a while, money market account, I think, until she could fully and smartly decide what she wanted to do, BUT . . . he also told her to take some ‘mad money’ and to do with it whatever she wanted, a ‘no guilt’ shopping spree. Some ‘go crazy’ $. So, that’s what she did. I think she took $10,000 and went shopping. Didn’t spend it all, not nearly, but she did go to the mall and just bought stuff that she always wanted – anything from clothes, CDs, furniture, etc. Again, didnt spend nearly all of it (maybe around $5000) . . . but, it did get rid of that itch, that “ooh, I just won the lottery, let’s go crazy!” itch. She got it out of her system and was able to, a couple of months later, to calmly decide what to do with the rest of her windfall. She helped finance (or flat out bought, I dont know) a retirement home for her parents, paid off college loans, set aside money for her brother’s college education, took two WONDERFUL trips to Europe and put aside more than half of her winnings for long term savings, retirement.

Wouldn’t work for everyone, but I know that my friend appreciated having some immediate ‘fun’ $. She said it made ‘being smart’ about the rest of the money so much easier.

I wish my parent would follow Brian’s parents and give us the inheritance a bit at a time so she can enjoy the results.
We do expect a windfall when my parent passes. We will split it between us and the kids- equally. That gives them more tax implications than us- but they can make decisions that can change their lives. They will each, most likely, continue in their professions (which are low pay-but they love) and put down a lot for a house. Since they have followed in our “no debt” attitude, they should be set to go. Our part will go soundly into our retirement accounts- which will mean that our kids will enjoy it- a bit at a time- in about 30 years.
Small windfalls are split between fun and retirement. Usually the fun, these days is spending money on the grandbaby!

We usually get a sizeable refund at tax time, and we have paid off debt, taken 2 trips to Disney w/our 3 kids and relatives, trip to North Carolina, purchased furniture, paid the property taxes, etc. I have enjoyed the trips, but frankly, I wish we would have saved/invested…we’d easily have AT LEAST $85,000!

A little off-topic, but since we have very little saved in short-term liquid accounts (we have been saving in a deferred retirement account for 12 yrs.), we were able to qualify for fin. aid for our daughter’s private H.S. tuition. If we had saved a lot, we wouldn’t have qualified at all. So, my question is, wouldn’t saving in 529 accounts (or other vehicles) for children’s college tuition likely disqualify us for any aid in the future? (We have been living on one income for 14 years). Anyone know more about this topic? J.D.-can you touch on this? I know some would consider this approach irresponsible, but my husband and I expect our children to contribute at least half to the college expenses like we did ourselves.

I recently bought a condo, having budgeted strictly for ~4 years to do it. About a year ago I won $1,000 playing video poker at the casino. I put the cash in an envelope, sealed it, and deposited the money the following monday in my downpayment account. I did the same with my bonus (paid over 2 years). It felt really good!

I have 1 instalment of my bonus left-it is going straight into my investment account where it will be put into an income fund designated to pay my power bill-and ultimately all the rest of my bills when I retire. My target for this year is $8,000, which at 8% should yield somewhere in the region of $40/month in income, which can be used to pay a bill. Im about halfway there and the bonus should complete it.

By the way-I dont gamble often -once or twice a year-I go with a set amount of money that I can afford to lose and leave when it is gone….

All the above were sums in the $1,000-$5,000 range and I already had major savings goals I was working towards. Were I to receive a larger windfall I would do what your friend did: set aside the tax, enjoy 1-2%, and think for a while/get advice, on what to do with the rest (pay off debt, invest). And learn to say NO to people asking for a handout. I would also donate to charity-as a professional fundraiser, I cannot ask others for money if I don’t give myself, and I love to give to good causes when I can afford it. These last 2 sound contradictory-what I meant was, by all means give money, but think your plans through for awhile before doing anything and do what YOU want to do with the money, not what a lot of other people want you to do.

After my dad passed away last year, my mom sold some very valuable property they’d owned and (very generously) gifted $24k to each of their four daughters. I guess the idea was that, once they’d sold their business and officially retired, they were going to give us that money together; when my dad died, my mom sold the business and the property and gave it to us from both of them. I’m not sure what my sisters have done with their share, but our share has sat in a high-interest savings account for about 9 months now. There’s no tax to worry about. I want to use a small chunk of it (less than $1,000) to purchase something “permanent” that will always remind me of my mom and dad and that we’ll have forever, but I haven’t figured out what that will be just yet. The rest will be part of our next down payment for a house (we currently own, but live in Michigan, so we’re not expecting to sell quickly or for a lot when we’re forced to move in a year).

We don’t have a lot of debt – just a mortgage that we can easily afford and my student loan that has a super-low interest rate. Our emergency fund is fairly healthy, so this seemed like the best plan of action for us. If we weren’t going to be moving in year, we’d probably hire someone to help us decide where to invest it for retirement or some other long-term goal.

I inherited $37,000 from my great grandfather whom I had only spoken to once or twice in my life! I also had no idea that he was wealthy. He was very frugal and kept all of his money in investments. So, it can happen to anyone! This first of all made me want to be able to do the same for my family one day…even the ones that I will never meet. The biggest lesson that I learned after my husband and I did a jig and proudly pronounced that we would never be broke again… is… it doesn’t matter how much money you have, but what your spending habits are. I always had in the back of my mind…”if only we had a little more money…” I can now look back on this experience and see that is not the solution, because we are right back at square one struggling to pay bills not even two years later. I know that a lot of you are financially savvy which is why I read this blog! I need to learn how to save and be frugal no matter how much money I have! I spent $10,000 on furniture and home improvements. I gave $10,000 away to those in need, $5,000 on vacation at Disney World (that place is expensive!)and the other $12,000 disappeared in minor purchases, but did help me to become a stay at home mom for the past 2 years! Next time I will put it all in a cd for 6 months so I will not be able to touch any of it and will be able to use my head in a calm and cool manner and pay off my debts and save and invest!

Up to 2,3 years ago I could have said I have never received a windfall (put myself through grad school, eloped, no free vehicles, etc) but a little over 2 years ago received about 8K from the in-laws. We established 529′s for the 2 kids and put 2K each in, put 1k towards the car payment, and the rest in a savings account. Ostensibly the savings account was to be the start of our e-fund, but we ended taking out most of that money for a downpayment for new windows. So in retrospect in a matter of months the money was “spent”. The only thing I would have done differently was to put more into efund and not touched it, and made the contribution for the 529s rather than lump sum a monthly contribution so we could have taken advantage of dollar-cost averaging.

I’ll throw my name in as one who recommends sitting on the money for a few months at least.

When my father died, he left my brother and I his life insurance policy. After receiving the cheque in the mail, I was a wreck for a few days while in shock.

My uncle suggested waiting a few months for the emotions to wear off, which I did. It really does work! After that I set aside a few thousand bucks and bought myself a nice guitar and amplifier, and then paid off my student loans with the majority. The remainder I set aside and later used for a down payment of my first house and for investments.

I just received my annual bonus at work today, and I used most of it to pay off debts (including a student loan, freeing up $200/mo). I spent maybe 10% on fun stuff, and I’ve a little left that I’m holding on to for unexpected expenses.

The windfalls I’ve received have been bonuses from work, and the rule we use for those is 10% of the gross is given away, then I get a splurge of some sort, and the rest goes to savings. The bonuses may be $2,500-25,000. For the last couple of years, the splurge has been a piece of jewelry in the $200-300 range. When we bought our 2 cars, we knew I would be getting a bonus in a few months after, and so we used those bonuses to pay off the cars in full. (We won’t be getting a bonus this year, though.)

The only other windfall I’ve received is $2,000 from my grandafather’s estate. We gave away $200, then put the remainder in our child’s college savings account. I like that I will be able to tell her later that her great-grandfather helped her go to college.

I wish I had read this back in 2001 when I received my windfall.

I got an inheritance of about 50k.

We spent about 12k to pay off our debt(which we soon re-accrued), put 10k in a CD (wanted to put in more but that was all that was left after…) we “invested” most of the rest on furniture for our house.

I say most of the rest, but it was more like half of the rest because I really can’t account for the other half. It just “went away”.

I have beaten my self up about this ever since, as we are in a much worse financial situation than we were before, and I make much more money than I did back then.

Well, lesson learned? I hope so, but I don’t expect any more windfalls to come our way.

edit: BTW, we ended up withdrawing the CD before the 6 months were up and paying a fee.

My recommendation would be to put it in savings for a minimum of 3 solid months. Why? Because you will spend that sum, mentally, 12 different ways – I guarantee it, before the 3 months goes by.

I got an unexpected $500 recently. I made a list of all the things I’d love to buy with it (food processor, commuter bicycle, new shoes, travel), and I added up the total expenses of my wish list (more than three times the amount of the check!). Then I prioritized the items on the list. Travel was tops, so I stuck the check in my travel account, which has been sadly depleted.

Good thing, too, because the next few days I found out about two fun short weekend trips I want to take, and now they’re funded!

(My car is paid-for, my credit card is paid off, my student loans are at 2%, and my job is very secure.)

I inherited a large sum of father when my father died back in 2007. Aside from the previous comments about caution and spending carefully after the initial shock, I would add the following remarks:

1. For a large inheritance (PARTICULARLY when part of it is in an IRA!), don’t just put aside taxes, hire really really good tax professionals (CPA and/or tax attorney). I know these guy’s aren’t cheap, but the tax ramifications of $$$ beyond your usual experience are more byzantine than you can imagine. I didn’t, and now I’ve got to deal with all the reporting, distributions and paperwork that I didn’t handle correctly on my own.

2. As far as what I’ve learned about taxes:
* even if the estate was below the Federal threshhold, you might still have to pay state estate taxes. Some states don’t have any but mine taxes 6% of the FIRST dollar of the estate– no part of the $$ escaped the estate tax

* if you want to set up an “inherited” IRA to defer taxes on the IRA, this has to be done a very specific way. As I said before, take thee to a tax professional

* even if there’s no estate tax, you’ll have to file an income tax returns for the year of death (if you’re the executor) and any subsequent years where significant income is trickling in on the estate.

* keep every scrap of paper related to the inheritance and copies of any paper you send out related to that $.

Hope this helps someone from making the same mistakes I did.

We got back more than expected on taxes this year ($3600). Spent 600 for fun (a couple camping trips and some new stuff for the pool), 1000 for debt, 1000 to ING account, and 1000 to local CU (not our regular one; we don’t have ATM card or anything like that for easy access) for the second half of property taxes this year that are due in November, which frees up monthly payment budgeted for property taxes to now go to debt.

Any windfall before Dec 15, 2009 would go towards the mortgage. Since I’ll be mortgage free on that date, any windfall afterwards would be split evenly between the Honda Fit fund and the early retirement fund. However, as I’m destined to have to work for any money I need, I won’t be getting the Fit until Q3 2010 because only half of the money that previously went to the mortgage would go towards the Fit fund.

After Q3 2010, money will be split between the early retirement fund and another investment property.

We got an unexpected $1000 after fees were paid from a judgement that I thought we would never recover, as well as $3000 from my wife’s share of her deceased father’s life insurance policy. Our tax return refund was about $4000. They all went into our emergency fund to bolster it after we had our rental property decimate our fund when the tenant skipped and we had to pay 6 months expenses for the property mortgage and maintenance before we could get a new tenant.
Trips and other discretionary expenses are taken from earnings. If I cannot swing the expense, we don’t go.

I cannot overemphasise the importance of an emergency fund. Not having debt apart from a mortgage helps also.

I have two windfall stories:

First:

For the past 6 years I have received two bonuses from work annually. Each year they have been getting progressively larger. Last year, I received 40K in bonuses.

Prior to last year I was in a cycle of pay off my credit card debt and personal loans with the bonuses and then spend the rest of the year accumulating more.

Two years ago my mom pointed out to me that my bonus was more than what she made the last year at her job. And I realized I had to stop the cycle.

I’m continuing to pay off my consumer and student loan debt, but this year will be the first time that I’ll actually be putting most of my bonuses into savings, I’m really excited.

Second:

Last year I learned that I’ll be receiving less that 5K in an inheritance from my estranged father this year. I’ve already planed to set the money aside until I’ve paid my taxes and haven’t decided what to do with it after that.

On the flip side, when my younger sister found out about the inheritance, she took out a personal loan, stopped paying her rent and spent all of her money on herself. She was counting on getting the money sooner than later, and the money is coming later. Unfortunately, she is being evicted from her apartment this month, she is delinquent on her loan, she currently has no source of income and her credit score is so bad that she won’t be able to find a new place.

It pains me to see her in this situation, but she made all her choices knowing that there was no guarantee when we would get the inheritance.