Sorting Through the Questions That Come With a Financial Windfall

byAnde Frazier

Series. THE BREAKDOWN

October 3, 2019 .3 min read

While finding that you have come into money may sound fantastic at first, there are many unexpected things you should be aware of. Whether you’ve won some money on your last girl’s trip to Vegas, or your receiving money after the death of a loved one, there are a lot of questions that come with it.

With the complicated money restraints that come along with experiencing windfalls, we’ve broken down some of the biggest questions and created a list of what you should ask your expert.

Payment Types

First, find out how you will receive the money. Will it be a lump-sum or in payments? If payments, how long will the payments last?  Can you access the money as a lump sum or a stream of payments your only option (this is typically called an annuity)?

If you have the option of how you will take the money, consider not just your needs and goals but also your behavior. 

If you are the type to spend money easily, then choosing a stream of payments might be a better option for you.  This would guarantee money each month, however, you would likely only have access to the payment amount and not the remaining balance.  Consider the tax consequences though, as it is likely these payments will be taxed at ordinary income tax rates. In addition, there are many ways this payment stream could be invested so pay attention to the impact of inflation over the time period in which you would receive the money.  Could you do better on your own?  

If your behavior around money is one of saving and being frugal, then taking a lump sum might be the right choice. You would have complete control over the money and how it is invested.  You could also choose investments that give you some tax benefits, via capital gains rates, which are lower than ordinary income taxes. And it is likely your money would grow faster than an annuity and give you flexibility with how you access the money.  

Whichever choice you go with, continue to monitor the management of that money so that it is working for you and not against you. This is where a good financial professional can help, as they will know all the ins and outs of how to properly structure the payment so it is right for you.  

Taxes

Are taxes being taken out before you receive this money? In some lawsuit settlements, there is no tax, but in lottery winnings there would be, so check with your tax preparer or attorney for guidance.  

Once you know how the money will be taxed, consider how receiving this money will affect the rest of your tax situation. It may throw you into another tax bracket, which means you should be prepared for that.

What To Do With Your New Found Money

What are your most immediate needs? Is there any debt (credit cards, student loans, borrowed money from a friend?) that you want to get rid of?

Are there any long-range goals you have been waiting to get started on? 

After getting this money, start by paying yourself first. Set up an emergency fund, pay down your debt, and start setting yourself up for the future. Coming into money can allow you to find more financial freedom in your day to day life.

How Does It Feel

How does receiving this money make you feel? Guilty? Happy? Scared? Excited? 

Depending on how you’ve come into this money, it could be a sad or exciting experience. Take stock of how you feel, and see what that money really means to you. If it came from the death of a loved one, using the money to secure your future will certainly honor the person who left it to you.  Or, if it came from a more exciting experience, maybe use the money to start that dream business you’ve had your eye on.

Whichever way you come into money, arm yourself with the knowledge of what it means for you and your life, and be prepared by asking the right questions.

in this issue

  • safeguard your identity
  • date safe
  • cover your assets
  • protect yourself
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