Getting an inheritance or financial windfall

In the course of our lives, many of us will get a chunk of money from a relative who passed away, a court settlement, a gift, a divorce, sale of a business, retirement lump sum or something totally unexpected like winning the lottery. This amount of money could be relatively small or huge, but whatever the size of the windfall, it is out of the ordinary.

First of all, don't be in a hurry. Really think about what you want this money to make possible.

Mad money

Many people have a huge urge to treat their windfall as mad money. "Mad money" has two qualities: first it is spent fast and makes you feel like a kid in a candy store, and second, if someone quizzed you about what you spent it on a year later, you wouldn't know. We have nothing against using some portion for your windfall for mad money, but keep it to an amount you feel good about.

Big splurge

The second most common urge is the "big splurge". Perhaps this is a vacation or a new car, plastic surgery, jewelry, or a new wardrobe. Big splurges have the quality of being something you haven't given yourself before and suddenly really want. That new ski boat might change your life. Perhaps your big splurge really has a lasting effect on your quality of life. Perhaps it is a big waste. Whichever it is, it costs a lot.

Financial goal achievement

Finally, many people feel that this is the time to get a leg up on their long-term goals. Many people squirrel away windfall money to invest for future goals. Possibly, this money can replace saving for a goal, thereby freeing up cash-flow you would have been saving for existing goals. Perhaps this inheritance funds a college education, lets you buy a home, or allows you to retire earlier.

It's worth reviewing your financial goals to see if your previous goals still are accurate. You may have new goals now that you have this money. Sometimes a chunk of money changes your life so much that you need to turn the page and rethink everything.

This is a frequent reason people see us. People who have come to see us tend to feel good about using windfall money if it makes a difference in their lives and they know they will remember how they spent it. Additionally, for many people, it's important that the person who left this money to them would approve of the way it was spent or invested.

We work with windfall clients to create a plan which may include mad money, splurges and goal fulfillment. Windfall money can provide fun, treating yourself, and taking care of business. All three uses of this money have their place. Sometimes it's important for the dutiful to take a special vacation or the spend-thrifts to create a cash-reserve account. Planning windfall money is a great opportunity to get into better financial balance.

If this money is an inheritance from a close relative be especially thoughtful about its use. Allow yourself six months before you make major life changing decisions.

Barbara Bachelder, CFP® for Wealth by Design, LLC