Ask the Readers: How to Handle a Windfall?
Published on - June 19th, 2009 (Modified on - July 27th, 2009) (by J.D. Roth) 
It’s been a while since we touched on the subject of windfalls: money that unexpectedly falls into your lap. It’s been so long, in fact, that I’ve started to receive questions about them, including this one from Aaryn:
I wanted to get your advice as far as the distribution of windfalls. Would you put a certain percentage in a savings account? Invest it? Keep some in your regular checking account? What is your recommendation? Would this fall in line with the balanced money formula?
Though I’ve written about windfall management before, it’s been almost eighteen months since the last time we discussed it. At that time, I didn’t know anyone who had experienced a sizable windfall. Now I do. My friend Joan inherited a large sum of money earlier this year, and I’ve been able to watch first-hand how she’s handled it.
A large windfall
The first thing Joan did was set aside money for taxes. Depending on how big your windfall is, you may not need to do this. You’ll owe them, of course, but if your windfall is just $100 or $1000, you can probably scrape the money together at the end of the year. But if your windfall is $100,000 (or $1,000,000!), you should set the money aside immediately. I think Joan put her tax money into a money market account.
Next, Joan chose to use a little of the money to treat herself. She redecorated her house, which is something she’s been wanting to do. I know this project cost quite a bit, but I’ll bet it was still just two or three percent of her inheritance.
I thought Joan would invest the rest of her new-found wealth right away, but she didn’t. She let it sit in savings for a few months because she was scared to make a wrong move. She’d never had a lot of money before. Finally, she interviewed some investment advisers in her hometown, and she chose one that she felt comfortable with. She sought professional help. Now that she’s had time to let the emotion drain from the situation, she’s ready to invest.
Joan was fortunate in two regards:
- She didn’t have any debt. If she had debt, she would have been wise to eliminate it after using a bit of the money to redecorate her home.
- Without knowing, she followed the standard advice for how to manage a windfall successfully.
Joan was also lucky to have received a large windfall. What if her inheritance had been smaller?
A small windfall
I’ve experienced many small windfalls in my life, and I’ll bet you have too. I used to get a windfall every spring when I received my tax refund. And, like clockwork, that windfall would vanish through my fingers just a few days later. (That’s one reason I no longer aim for large tax refunds.)
More recently, I’ve found better uses for “found” money. When I was working to get out of debt, I’d apply my windfalls directly to the balances I owed. Over the past two years, I’ve used windfalls to build my savings, and then to save for my goals. I still follow a personal rule of thumb that I can use 5% of every windfall for fun (so, $5 out of $100, or $50 out of $1000), but the rest of the money is applied immediately to my personal financial goals.
I find it exhilarating to fund my Roth IRA early in the year because I’ve been diligent with the little windfalls. And, of course, my Mini Cooper was purchased almost entirely with small- to medium-sized windfalls. When you don’t fritter them away (as I used to do), windfalls can really turbo-charge your savings.
Your take
Have you ever experienced a large windfall? Inherited money from Aunt Madge? Won the lottery? Sold a business? How did you handle it? Would you make different choices now? And what about small windfalls? All of us receive those. What do you do with yours? What advice do you have for somebody who receives a windfall?
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This article is about Ask the Readers, Choices, Odds and Ends, Savings
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Around ten years ago I inherited $100,000. The lawyer who handled the estate said, “My best advice is to put this somewhere safe and do not touch it.” I put it straight into the highest-paying CD I could. It is now over $130,000 in the bank. You can bet that anything I could have bought with it wouldn’t be making me feel as good as I do now with an extra $130,000 in the bank. I already had money in index funds, etc., and when the crash hit, I was very glad this money remained untouched. (Incidentally, I had no debt except my mortgage, and I paid the mortgage off without the help of the inheritance this year.) I think that unless an emergency comes along, keeping the whole windfall in a safe place and not touching it is the way to go.
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I got a $73K inheritance earlier this year from life insurance policy. I was out of debt and saving for a car, which needed to either be fixed for more than it was worth or a needed a different car. I bought Grandma’s Car and put $5K in IRA. I gave a little to charity. The rest is in the bank while I wait. A lot of has happened in the past year … two deaths in the family, and two changes in bosses to have made work more difficult. I’m waiting for the storm to die down.
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We don’t receive large income tax refunds because it doesn’t make sense to give the government an interest-free loan when we could use that money every month.
Regarding taxes on inheritances, I’m sure estate laws vary from state to state. However, usually any tax due is paid by the estate not by the beneficiaries. My husband is in the process of settling his father’s estate. He will have to file a final tax return for his dad from 1/1/09 to the date of his dad’s death. And then he’ll file a tax return on behalf of the estate for any income the estate earned up to the point of distribution. The amounts that my husband and his siblings will receive is not taxable to them, however.
We have each received bonuses in the past. Mine were unexpected and ranged from $5,000 to $15,000 to $25,000 (on the 25th anniversary of working for my boss). We added those amounts to our savings accounts, and they helped fund the landscaping of our backyard and an anniversary trip to Hawaii. My husband receives a check each March for the sales commissions he earned the previous year. The last several years these commissions totaled about $45,000-47,000 gross (basically about 1/3 of his total pay), about $25,000 net. The money gets added to our savings and is used for emergency fund needs and helped pay for a new roof ($11k) on our house last year. We’ve also used it to fund Roth IRAs.
My husband expects to get about $70-75k from his dad’s estate. We had talked about paying off our mortgage which now has less than five years left on it and a balance of about $50,000. However, in this economy and with me unemployed for almost two years, we may just buy some short-term CDs and keep that money safe.
My three siblings and I each inherited about $22,000 thirteen years ago from our great-uncle. They all spent the money they received on various items and paid off debt. (One sister used her money for a downpayment on a house, the other bought a baby grand piano.) Being the conservative sister that I am, and wanting to honor our uncle who as a public high school science teacher probably saved for years to accumulate the money, I parked my money in a Fidelity money market account. That money has now grown to $35,000 and is what I call our “if we both lost our jobs fund.” Combined with our bank savings, we have $70,000 in cash and could easily live for a year if my husband lost his job without having to worry about tapping into any retirement funds. To me, money means security and opportunity. I’d rather be able to sleep at night knowing we can always pay our bills no matter what, and I’d rather take a memory-filled trip than buy a new car or redecorate my house. Thankfully we don’t have any debt to pay down besides our mortage. Windfalls should be treated with respect, especially inheritances. An inheritance represents someone’s lifetime of work — don’t blow it on something stupid.
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Two things.
1) a small splurge (probably 5%)
2) Pay off bills.
If there is anything leftover, then I’d invest it.
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In the past I used small windfalls (my bonus was small), to bump up my 401k.
We used a profit from a house sale and all the $ we could scrape up to put a 20% downpayment on the next house. The profit was a sort of windfall.
My H became eligible to purchase stock options so we took out personal loans to buy up all the options. Then we paid the loans off with regular income. That was kind of an ‘opportunity’ windfall.
This year I inherited about $100k from life insurance policies. I put it away for some months and am in the process of investing it conservatively in a plan we agreed upon.
When we liquidate some property in the estate there may be some additional money and we will also save that. We have been talking about some small remodeling projects in our old house, so we may use some of the final estate to make that happen. We are planning to sell down the road so it would be with an eye to the market and not an all-out dream house remodel thing. We will also put aside money for taxes because there is a 4.5% state inheritance tax.
For me, the idea of setting a percentage of the windfall aside for a splurge isn’t the way I wanted to slice it. I like the idea of using the entire windfall to advance my family’s financial security. Instead, I splurged out of my regular paycheck. Usually I am striving to set money from my regular pay aside in savings, so instead I took a break from that, did some charitable giving and a bit of shopping.
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I’m a no-fun squirrel and money is my acorn. If I got a windfall, doing anything other than running to the bank waving a deposit slip would give me heart palpitations.
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I’m not sure tax returns should be considered “Windfalls”. I think if you get a return every year your screwing something up.
I don’t think I’ve ever received money I wasn’t expecting but I’m still young so hopefully some day soon
If/When I do get it I’d like to think I’d donate some of it. Maybe I won’t but I’d like to think I would anyway. Plus it might help with the tax situation.
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Our “windfall” was when both DH and I inherited a nice but not life-changing sum from our parents, within a year of each other, about eight years ago. DH bought us a new (inexpensive) car, our first new car ever!
We have yours-mine-ours accounts. We both parked our inheritances separately, they were “sacred” to us because we both had very frugal parents who lived through WW2 in difficult circumstances. One day I saw an ad for a cheap 1BR apt. I thought, hmmm. Our parents really believed in real estate, it seemed like a good way to use that money and “honor” them at the same time. I said to DH, I want to do this. DH agreed immediately.
So we bought two rentals. We made some mistakes, it has definitely been a learning curve. But we bought them at a great price. One has doubled in value, the other has quadrupled (there was some paperwork to do and the previous owner couldn’t be bothered to do it. I did it. And I convinced the owner of the other, identical apartment next door to do it too, so we could split the cost. It took me 18 months, but I did it, lol.)
They are our supplemental retirement when the time comes, and one day they’ll be our kids’ “windfall”. I hope they’ll be smart with it.
There’s still some left over for college for our youngest (we’re in Europe so college is not crazy expensive here, although it’s far from free as many Americans seem to think) and some left over for the occasional vacation. But never, ever, ever for a regular bill. That money is still “sacred” to us, and it needs to be treated accordingly.
I know this may sound silly but I believe that our parents are happy about us using their money to “grow” our wealth and pass it on to our kids, the same way they did for us. We are both educated but we are both expats who but don’t earn great salaries so this “windfall” was very important to us.
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When my uncle died 8 years ago, my grandmother was sweet enough to share part of the life insurance with my brother and me – our parents died when we were much younger and our uncle was like a father to us in many ways. I got about $15,000, which went directly into paying for my M.A. program, which I found out I got into with a 50% scholarship the day after my uncle died. This was a really good use of the money, and I’m happy I spent it that way, and I know my uncle would have approved. My grandmother paid off her mortgage with it, and who knows what my brother (18 years old at the time) did with it.
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Speaking of windfalls, and in some cases, inheritances, I would really recommend advice an attorney once gave me. He suggested to his clients that that put age 25 when kids can inherit anything, and not 18 or even 21. There’s just a big difference re maturity from say 18 to 25, and most of us will agree. I’ll never forget when I was 35, I worked with a woman 25 and she said that she received a large inheritance from an Aunt when she was 18, but it was all gone, and if she knew then what she knew now, she wished she had the money because if so, she would have used it as a down payment on a house. I asked her what happened to that inheritance? She said she bought a brand new sports car with it, a fur coat (that was back in the day) and took a trip. She said she totaled the sports car less than a week after she bought it, (had not yet set up auto insurance), and left the fur coat on the back of a chair at a bar one night. When she went back to get it, it was gone. Anyway, here she was 25, looking back and kicking herself.
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In 2004 I received a substantial inheritance (north of 400k once the real estate was sold). I bought a brand new Lincoln LS for cash (actually a leftover 2003, so I got a great deal), paid off the mortgage on my house, and invested the rest. Since part of the investment was going to throw off an income stream, I began maxing out my 401(k) contribution at work. That way I could use some of the taxable investment income for part of my cash flow needs while getting maximum tax benefits for retirement. I’m still maxing the 401(k), still driving the car (which I intend to keep until it’s junk), and planning to retire next year.
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For me, my parents have been “pre-paying” my inheritance. They don’t put any strings on the gift. So what I’ve been doing is putting 2/3rds of it into my emergency fund and 1/3 of it into my travel fund. Once I get my emergency fund up to the 6-month mark, I plan to shift more of that money into the travel fund and also increase my Roth IRA contribution.
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You could pay your bills for the next few months ahead. This would relieve much stress.
Definitely plan immediately. Tell your money where it’s going to be spent before you fritter it away.
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My wife and I recently received a windfall from her grandfather passing away. He left us approx. $2.5 million in an inherited IRA. We have to take the required minimum distribution each year, which should add a nice amount to our income. I had never heard of an inherited IRA prior to this, but I believe it is one of the best way to pass money on to future generations. Even after paying the state estate taxes, we’re left with more than enough for our retirement. That money can grow tax free for the next 30 years until we retire and we can pass any remainder onto our kids.
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I agree with Chris Brown (post # 57). I don’t believe tax returns meet the definition of “windfall”. Tax return is money you earned and basically lent the government interest free. It’s not that considering it a windfall is a bad thing, just be careful not to treat it as “found money” when in reality you worked hard for it.
As far as inheritences, it never hurts to park the money somewhere and think about the best way to use it. I’ve inherited money once in my life… my great aunt left all her grand nieces and nephews $45K each. We used most of it to pay for the half of my college that wasn’t covered by scholarship. The left over (about 15K) I used 2K to add to my stock portfolio and I have 10K earmarked for a house down payment.
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Another thought: they say that fortune favors the prepared mind. I already have a plan for the “really big” windfall, and I will know what to do when it materializes! It is this: pay off my (small) remaining amount of debt, set up enough in my retirement account to guarantee a healthy income, pay off my house, help the family out with a few things and THEN, set up a private foundation. I find that once I know my bills etc are paid, I really dont have that many expensive “wants”, and shopping per se doesn’t interest me. I already have art, nice furniture etc. In my job, I’ve noticed that a lot of foundations are run by trust lawyers and others in their 80s and 90′s-they seem to go on until they are really really old. It seems a good way to stay sharp, live long, have fun, remain engaged with the world, and do good in the process, and I look forward to running my own foundation and having fun making research grants, then setting it up to operate indefinitely after I am gone…..
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Now that we have gotten to the point of no outstanding debt except the mortgage and have a healthy six month emergency account our views on windfalls has changed. Where before we would put it towards the cars or the CC, without these we now have a fund called ‘Mad Money’. This is money we use to buy things for ourselves or the house that are no necessities. A leaking pipe is a necessity, a new awning for the back porch is not. We setup another account at ING and put money that we receive from CC points, birthday money, bonuses, overtime, and Ebay/garage sales. There is never an enormous amount of money in there, but it has been a nice perk comparative to our regular income, which is strictly budgeted out.
Full disclosure: We have never received a large sum of money at one time (>2500). Though this year once my grandmother’s estate is settled we will inherit about 10000 dollars. We plan to stick in a savings account until we can think clearer about what to do with the gift.
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I agree that tax refunds should not be considered windfalls.
A windfall is money that you either didn’t earn or didn’t expect. A refund is certainly earned and should be expected if you get one every year. What a refund really is is the government paying you back an interest free loan and/or a misguided forced savings scheme.
A REAL windfall would be things like receiving an inheritance, winning the lottery or finding a Rembrandt in your attic.
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Don’t tell anyone about your windfall.
If you come into a windfall, order this guy’s book and read his columns, e.g.:
http://www.donmcnay.com/content/view/64/9/
And again, don’t tell anyone about what you’re getting, unless you want everyone and their brother helping you to spend it.
You can always help friends or family anonymously.
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My sister and I received a generous inheritance in January. Since our only debt was our mortgages, the past few months we have been on a spending spree. But it’s making me uncomfortable to be so loose about my spending. I am now in the process of setting up the YouNeedABudget software, so that I can have a better understanding of where the money is going. I want to be sure I can be as generous to my heirs as my parents were to my sister and me.
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Save and invest– it isn’t your income so don’t start living like it is . . .
Look at professional athletes– many end up broke. Their windfall is income, but it is a limited income. It is a lifetime’s income compressed into a short career.
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Quick question.
Why would you have to pay tax on a lottery win????
Sassy
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I was recently awarded employee of the quarter with a $250 check but I can’t get myself to spend it. I thought I would buy one single thing to commemorate it like a camera but if I needed a camera, I would have already bought it before. So, I converted the check to cash and it is sitting on my desk in an envelope. I also recently sold my laptop for $400 and I don’t need another one so that makes it $650. I feel guilty spending it on myself but on the other hand, I don’t want it to be swept into the family budget.
Suggestions?
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I’m a big fan of not having a mortgage. I don’t have any kids, credit card debt, student loans, or car payments, and I already have a savings cushion for emergencies. So any windfalls I get (and all the extra money I have left over each month from my paycheck) go toward paying off my condo. I will have the title to this baby in two and a half years, when I’m 41.
Unlike some others here, I am not very interested in accumulating vast sums of wealth. I’m living through my third recession, and I think this one will turn into a full-on depression which we may not recover from in my lifetime. My goal, when my house is paid off, is to work less. I’m never going to have a stockpile of money big enough to retire for thirty years on – that is a pipe dream cooked up by the Social Security Administration and is far beyond the reach of the average person. But as long as I am willing to work, say, half of the year, I can spend the rest of my time taking cycling tours and enjoying life. I won’t mind work so much when I only have to do it half of the time. Plus, talk about a tax shelter – they will never be smart enough to stop taxing income, so I may as well use that to my advantage. And I believe that a marketable skill and the willingness to earn some money is a far safer investment than anything else you can put your money into today.
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We got about quadruple what we normally get back on our taxes this year. We put the money into our emergency fund as we don’t know what will happen with our job situations. NORMALLY, we would probably put the money into our children’s college funds so we can get those paid off earlier in the year.
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“What advice do you have for somebody who receives a windfall?”
Coincidentally, I’ve written a post on this topic a few months ago and I’d like to share it with GRS’ readers.
How to Spend a Windfall Wisely
Cheers~
Mark
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What is this “windfall” you speak of and how do I receive one?
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Last year we paid off our remaining credit card debt with our tax return. Then we spent the past year whittling away at my student loans. I am happy to say that this year’s tax return paid off the student loans. Now we are going to fully stock our emergency fund with $15k, or about six months of husband’s base pay. This means that part of next year’s tax return will finish off the emergency fund, and the rest will go to a saving-for-house fund. We would like to eventually take a dream vacation to the UK but that will be a few years. I’m going to spend my time working toward all sorts of goals and not hoping for a windfall…in my life, something other than a tax return would most likely mean that someone has died, and I love all my someones.
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i’ve stumbled on this discussion from an article from http://www.boingboing.net and it seems like the timing is impeccable. i was hurt at work almost 2 years ago and am in the process of receiving a workman’s compensation ‘windfall’. 10,000 for my 17% permanent disability and 25,000+ for the insurance company buyout of the medical benefits i’m eligible for. it could be more and am currently in the process of having the offer scrutinized by a wc lawyer.
because of the long amount of time i was hurt we’ve incurred some debt (7,500) which is mostly credit cards and a couple other things but that’s it. no savings, no investments, no nothing and we rent an apartment.
so my question is this… what the EFF do i do?
besides immediately paying off our debt.
like the original post mentioned in the article, after the initial rush of realizing i was eventually going to have more money at one time then i’ve ever had and envisioning all the awesome things i was going to buy, i’ve started to recede into this cocoon of fear of doing the wrong thing. so what’s anyone’s advice?
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