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By Mark Colgan, CFP

Acquiring an unexpected windfall can seem like a dream come true and can certainly help improve your financial situation and prospects if you make sure you handle it correctly. Whether you receive an unexpected inheritance, hit the lottery, win a lawsuit, or end up with an investment that really paid off, follow these seven smart ways to invest your recent financial fortune.

Mark Colgan, CFP®, is a founding partner of Montage Wealth Management. Over the last 29 years he has helped hundreds of clients navigate through significant life events that require big money decisions. He is also the author of Death’s Red Tape, your Guide for Navigating Legal, Financial, and Personal Transitions When a Partner Dies,  a newly released technical guide by Mark Colgan on the logistics people have to contend with after they lose a loved one. For more information visit www.montagewealthmanagement.com.

Mark Colgan

1. Pay Taxes First

Unexpected windfalls are usually taxable so before you spend it or allocate it, take out however much you will owe on taxes and put it in a high-interest savings account until it’s time to pay taxes. That way you won’t be stuck needing to come up with the money during the tax season after you’ve already spent it. Then, you can invest the rest however it fits into your financial plan.

2. Pay Off Credit Card Debt

While this may not seem like a common investment, if you have a large amount of credit card debt and struggle to pay it off each month, ridding yourself of it will be a strong investment in your future as well as your credit score. Most credit cards carry a high-interest rate and carrying too much credit card debt can significantly hinder your ability to borrow in the future.

Pick the credit card with the highest interest rate and try to bring that one down as much as you can or pay it off first. Then, you can work on paying off the smaller or less detrimental cards.

3. Max Out Your 401(k) or Retirement Contribution

One of the most important parts of financial security is planning for the future. Having a well-padded retirement account can allow you to retire early as well as give you the freedom to do what you want without worrying about making ends meet. If you can, max out the amount, you can contribute up to your employer's matching contribution in order to get the most out of your investment.

Since the lump sum of money was unexpected, you will probably be able to get by without using it right away. Adding it to your retirement may be the best option so you can be better off in the future.

4. Invest in an Asset or Experience That Makes You Happy

One of the first things everyone wants to do after coming into a financial windfall is buy something they've always wanted. It is actually important to indulge yourself with a little something to enjoy the money. But think carefully before you buy the boat with the water slide. Consider something that gives value while doubling as an asset for your future, such as artwork, investment properties, or jewelry. Anything likely to hold, or appreciate in, value is a good choice. Just be sure to budget for it appropriately and then don't exceed that budget. Enjoy them today while planning for tomorrow.

Sometime experiences are more valuable than an asset. Alternatively, you could consider splurging a portion of the windfall on something fun for yourself and your family. Recent research from San Francisco State University found that people who spent money on experiences rather than material items were happier and felt the money was better spent.

5. Buy Some Land or Real-Estate

Land can be a great investment if purchased at the right price. Undeveloped land requires little maintenance or upkeep, and the costs typically only include the property taxes which will not be as high as a property with a house on it. You will be able to hold onto the land for development in the future, as a site for a retirement property, or just allow it to appreciate in value and sell it off when the price is right. An investment property such as a vacation home rental or multi-family home is an option as well.

6. Create Both a Short- and Long-Term Portfolio

It might be wise to retain the services of a financial adviser to either build on your current portfolio or start one that offers both short- and long-term investments. The short-term portfolio will be used to address the next five years in terms of living expenses and other financial needs you incur. This can involve investing a small portion of the money in investments focused first on preservation and secondarily on moderate growth. Then take the balance of the money and invest in long-term financial goals with a higher return, but potentially higher risk, focused on capital appreciation. This commonly includes a portion invested in equity mutual funds or stocks. It is important to include both short- and long-term financial goals so that you can not only have money for necessary living expenses when you need it but investments to take care of you in the long game.

7. Make a Plan and Stick To It

Money can have a way of disappearing quickly. When you fall into an unexpected lump sum you will want to make a plan of action and not let your emotions take over. Decide what is the best way to make the most of your new money then take action on it.

Planning is essential to ensure you make smart investments with your unexpected financial windfall. If you need help determining the best course of action to take with your newfound fortune, follow the tips above or contact a financial planner to discuss your options.

About the author: Mark Colgan

Mark Colgan, CFP®, is a founding partner of Montage Wealth Management. Over the last 29 years he has helped hundreds of clients navigate through significant life events that require big money decisions. He is also the author of Death’s Red Tape, your Guide for Navigating Legal, Financial, and Personal Transitions When a Partner Dies, a newly released technical guide by Mark Colgan on the logistics people have to contend with after they lose a loved one. For more information visit www.montagewealthmanagement.com.


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