Handling a windfall of cash is something we all would like to experience and sounds like a no-problem situation, but a big payout from lottery winnings, an inheritance, a lawsuit settlement can create significant problems.
You will be showered by investment “opportunities,” long lost relatives will show up with sob stories, and you might just be tempted to quit your job.
Financial planners quoted in Kiplinger’s Personal Finance say people use “found” money differently from money they’ve earned and in ways they will regret later. They recommend waiting six months to a year before doing anything with most of the windfall. During that time, put the money in a safe place that allows easy access, like a bank savings account or CDs.
If you’re dealing with a very large amount of money, it’s best to have a team of advisors working with you to manage your newly found riches. That team should include a tax advisor, investment advisor and a legal advisor.
When you want to share your good fortune with your children or parents, a nice way to begin is to make a tax-free gift of $13,000 to any number of people. You and your spouse together could give $26,000 a year without paying federal gift tax. You have a lifetime limit of $1 million to give away tax free.
But don’t quit your day job yet. If you earn $50,000 a year, you’ll have to invest from $1million to $1.5 million in conservative, income-generating investments to earn enough interest to replace that income.
And once you quit, you’ll stop earning money that contributes to Social Security retirement income.
It’s tempting to pay off your mortgage and your kids’ student loans, but before you do, be sure you don’t have high interest rate credit card debt and you do have the equivalent of six months expenses in your rainy day fund.
They say that most people who come upon a windfall lose it or spend it within a year, that’s because you haven’t yet grown into what it takes to keep that money where it belongs – in your pocket – or invest it in things that will make it grow.