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Smart Ways to Enjoy a Windfall

Jennifer Openshaw

Now the dust has settled, the papers are signed and someone's ready to send you a check in U.S. dollars for the amount. What should you do?

It's not a princely sum, but it's clearly enough to give a shot in the arm to your personal finances, not to mention your buying power. That's a good thing.

But no doubt, your mind is abuzz with possibilities, everything from round-the-world travel to quitting your job to a new car to supporting your favorite causes. I'll bet it's a sizeable list.

So what to do? The situation calls for careful thought. Although many people experience such a windfall sometime in their lives, they sure as heck don't happen every day. Whatever you do, the important thing is to get the most out of the opportunity, and to safeguard it against the many pitfalls you'll encounter.

For starters, here are a few reminders of what you shouldn't do.

• Don't do anything fast. It's easy to leap at the first opportunity to spend, invest or give. I'd wait a while to settle in and to fully appraise what's best. There may be significant tax issues; as a buddy of mine will tell you, $27,000 won on "The Weakest Link" becomes $18,000 real fast. One exception: It probably makes sense to pay off high-interest debt as soon as you can.
• Don't tell others -- unless they need to know. Many will arrive at your doorstep with "ideas" for what to do, which naturally benefit them more than you. And among friends, you may not want others to think of you differently.
• Don't rev up spending habits. New wealth, new standard of living? Again, wait for the dust to settle. Spending, once ratcheted up, is so, so hard to ratchet back.

Click here for the video version of this story from Jennifer Openshaw.

Now for what you should do. Bottom line: your windfall should become "personal capital" to be wisely invested for financial -- and lifestyle -- return.

That's invested, not spent. Now, realize I'm not a total Scrooge when it comes to money: I believe it's OK to have a little fun with a windfall. Here's my rule of thumb --blow 10% on fun stuff and manage and invest the other 90% very carefully.

Here's my list:

• Take a trip -- with an objective. Travel is a favorite and -- if the windfall is from a death in the family -- may even be necessary relief. I suggest travel with some career or future objective in mind. Check out some jobs, possible business locations, even places for retirement (and it's OK to have some fun along the way, too).
• Pay off home, or accelerate mortgage. A paid-off primary residence expands possibilities for a career change or needed time off, and it feels good, too. It's also a relatively safe place to stash the windfall, which makes sense if you plan to stay in the home. Alternately, if you haven't bought yet, it's probably a good time to consider it.
• Fix up your home. Make your house into a home, with a style or amenities you'll really want. Here's one of my favorites: create an in-home spa. Yes, you'll enjoy it. And you'll also feel less need to spend money to travel and "get away." On top of that, it will increase your property value.
• Build a nest egg. It's kind of obvious, but there's no doubt that a little extra investment capital will pay off down the road and provide more life flexibility. Set up a college fund, buy investment real estate, max your retirement contributions or simply put it away for a money market yield and something better down the road.

  Figure you can draw 5% of the amount for the rest of your life and it won't go away. Or, draw 10% per year, invested at 6%, and it will last 16 years.

• Set up donor advised fund. You can set up your own private "foundation" to give away money as you see fit, and realize immediate tax advantages (see my recent article). And if you have a sick parent or family member, nothing gives more return than helping them out.

Chances are, your windfall won't be six or seven figures, at least very often. Maybe it's only a $6,000 annual bonus. But the same principles apply, just on a smaller scale. Oh OK, maybe it is just fun money -- but only if your other bases are covered.