What's the best way to handle a financial windfall?

I was working in a car dealership in Las Vegas, trying to qualify a woman for an auto loan. Trying to find a loan for a person with a 504 credit score is difficult, and she wasn't making it any easier. I asked about the source of her $34,000 annual income.

"We were on vacation, and stopped at an Indian casino…" she began, as I wondered why a resident of Vegas would go to a casino on vacation, "and I won a million dollar jackpot on a slot machine!" She would get a $34,000 check in January, and run out of money about September, and just stop paying anyone until the next check came the following January. We were in year two, and already she was so far behind she would be out of money about June of next year.

"Do you have another source of income, like a job?" I asked, hoping to find something to work with.

She drew herself up as tall as she could in her chair, puffed out her cheeks and snorted, "A JOB? I don't need to work, I'm a MILLIONAIRE!"

Clearly she needed some help in handling her windfall, along with a major reality check. What should you do if you find yourself with a sudden financial windfall? How do you keep from blowing it, literally and figuratively?

Stop. Wait. Breathe.

First, take a time out. You don't need to decide everything right away, so put the money in a savings account or in short-term CDs for the time being. Take a deep breath. The suggestions that follow will guide you safely through the process.

Splurge a little.

Take one or two percent of the windfall and treat yourself to something special. In the case of a twenty you found in the store parking lot, spending 40 cents on yourself doesn't sound like much fun, but maybe stepping up from canned pineapple to fresh would do the trick. Inheriting $20,000? Have a night out and make a weekend out of it. A little splurge will make you feel like less of a slave to your bills and budget, and will make it easier to stick to the plan for the rest of the money.

Think about taxes.

Determine the tax implications of your windfall. Life insurance benefits are generally not taxed, but just about every other form of financial windfall will be. Set aside enough of the money to cover your expected tax burden.

Establish an emergency fund, or fully fund the one you have.

Next on the list is an emergency fund. If you don't have one, or don't know what one is, stop here. You should have at least $1,000 set aside for emergencies, and ideally three to six months worth of your regular expenses saved. Having enough available credit on your bank card is not the same thing, which is why you should establish this fund before you pay off your credit card debt.

Tackle unsecured debt.

If there is any money left once you have the emergency fund out of the way, pay off your unsecured debt. Credit cards, store charge accounts, and personal lines of credit generally carry higher interest rates than secured debt, and should be attacked next. Start with the lowest balance, and work your way up through the larger balances, paying off as many accounts as you can.

Enlist the help of professionals

Once the high-interest unsecured debt is gone, the easy decisions are gone, too. Now is the time to enlist the help of some experts to help you determine what kind of investments to consider, what your goals are for the money, and how much you should pay down your secured debt such as car loans and mortgages.

Ask for help from a CPA or a financial planner who is not paid a commission on the investments they recommend. If you have no idea how to handle large sums of money (and not many people do), a CPA, a lawyer and a financial planner can protect you from yourself and others while they teach you.

Consider long-term investments

If you are younger and still building wealth, you may want to keep making the mortgage payments and writing off the interest (assuming Congress hasn't taken away that deduction) so long as the return on your investments exceeds the effective interest rate on your mortgage.

Given the depressed real estate market in many parts of the country, this may be the perfect time to snap up that vacation or retirement property you always wanted.

But for many people at or near retirement, paying off the mortgage and replacing the uncertainty of investment returns with the security of owning the roof over your head makes sense.

Live within your means

Work with your financial advisers to make sure that whatever lifestyle you choose, your money will support it. Be realistic: a million-dollar casino jackpot that pays out at $34,000 a year will not allow you to live like a true millionaire, but it could be a nice supplement to your regular income or a big boost to your retirement savings. But with a little thought and planning, you can turn a windfall of any size into a meaningful financial gain.

What would you do with an unexpected financial windfall?

This Guide to Money answer includes the topics: Save, How to save.

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