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Making the Most of an Unexpected Windfall

Unexpected money is a wonderful thing, whether it's an inheritance, a bonus at work, a lottery prize or a legal settlement.

Problem is, people have a tendency to treat this money differently than hard-earned cash. There's a temptation to splurge: to buy that massive flat-screen TV, take a pricey vacation or make a riskier-than-usual investment. That's fine, to some extent, but only after taking care of the biggest priority: maximizing the effect of the unexpected windfall on your short- and long-term financial health.

Obviously, the right way to handle a windfall varies, depending on your financial situation, the amount of money you've come into and, as Americans have seen in recent months, what's happening with the markets and the economy. But whether you've gained $10,000, $100,000 or even $1 million, the same guidelines typically apply:

Take your time: Many financial planners and experts suggest stashing the cash in a CD or high-interest savings account, something safe and liquid, in other words, for a while. This accomplishes two things: First, it makes the windfall feel less like "found" money and more a part of your overall financial picture. Second, it gives you enough time to figure out the best way to handle the funds.

Figure Uncle Sam's cut: Whenever you come into money, tax consequences may follow. This is a crucial consideration, since taxes decrease the size of your windfall. Winnings from gambling, raffles, legal settlements and other windfalls are taxable, for example. And inheritances and life insurance settlements may be subject to estate taxes.
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