How to manage a financial windfall

People come into money in various ways, from happy winnings to uncomfortable settlements. After all, someone has to win the Powerball.

Whether your windfall comes from a legal settlement, insurance claim, inheritance or the lottery, the burden of an unexpected lump sum of cash will likely be heavier than you realize. The reason is that most people treat windfalls differently than earned money, and the resulting outcome too often is a loss of wealth, strained relationships and increased financial and mental stress.

The issue most people face when they come into money is they don’t know what do with it. Unlike the income we earn, we don’t have a plan for windfalls. It’s not part of our budget, so it’s easy to think of it outside the scope of our day-to-day expenses and long-term financial goals. This is the mistake. When newfound money is not part of our plan, it’s easy to spend. It’s also easy to overestimate its true value.

Press pause on the payout . . . and plan

The best “first” thing you can do with a financial windfall is nothing. Exercise financial discipline. Set up a short-term CD or put the money into a savings account or money market fund until you develop a plan for what you want to do with it. This will allow you easy access to the funds if needed.

The next thing you should do is assemble a financial team who can help you minimize tax liability and coordinate the construction of an investment portfolio that integrates with your short- and long-term financial goals. This team should consist of a certified financial planner, certified public accountant, estate planning attorney and an insurance professional. Their primary role is to help you make informed financial decisions. But make sure to take the time to interview your team and be comfortable they are a fit.

While each individual situation is unique, there are some general guidelines you should consider:

· Five for fun. It is a windfall, after all, so splurge—but only a little. Limiting yourself to spending less than 5 percent of your windfall will protect you from reckless financial decisions that can have serious long-term ramifications. Any niceties beyond that initial 5 percent should fit into your strategic financial plan.

· Don’t check out. As strong as your desire may be to quit your job, carefully think it through. Is the windfall really enough to replace the lost income, Social Security and possible health benefits you’ll be walking away from?

· Pay off debt prudently. It will be tempting to use your windfall to pay off your mortgage or your child’s student loan, but it shouldn’t be your priority. Your overall financial health should come first. Repayment of debt obligations, including credit cards, should be accounted for in your financial plan. Also, before you start paying off your debt, set aside a six-month emergency fund.

· Prioritize long-term security. Define your life goals. Perhaps you can be happier and make more money by changing careers. Investing in more education could provide you with a good return. Also, establish benchmarks for evaluating the performance of your investment portfolio. Looking ahead also helps you define and mitigate risk based upon your desired outcomes.

A helpful exercise you can undertake is to create a spreadsheet of how you might like to allocate your windfall. Include categories such as retirement, long-term savings, short-term savings, emergencies, fun, charitable donations, etc. It’s a process that will help you think about your windfall more responsibly and will provide your financial team with a good overview of your values and goals.

Execute your plan

Financial windfall or not, the key to financial security is to develop a plan and execute it. A financial windfall definitely presents you with more opportunities, but leveraging it for financial independence is not without pitfalls and does not provide a guaranteed outcome. That’s why it is important to work with your financial team to develop a plan you can live with. With their help, the decisions you make regarding your career, retirement, real estate transactions, charitable giving and estate planning will be sound and informed.

As you move forward through life, it’s important to understand that your plan is not static. It needs to be a living, breathing strategy that evolves as you grow. It also needs to adapt with and adjust to the demands of future market conditions. Your financial team should meet with you at least annually to ensure your goals are still being met.

At the end of the day, a financial windfall is a blessing. Whether it’s $10,000, $500,000 or $10 million, it should not be the curse that too often it becomes. It’s an opportunity, and proper planning—aided by a skilled financial team—can help you leverage the opportunity into something that improves the overall well-being of you, those you love and even the causes you care most about.

Jane Ensley manages the Enumclaw branch.