The average American has an exceedingly low chance of winning a Powerball or Mega Millions jackpot. In fact, only an extremely tiny proportion of the American population will ever be fortunate to experience the joy of winning millions of dollars from any lottery.
That said, most people will run into some form of financial windfall (albeit far smaller than a lottery jackpot) at a certain point in their lives. These small windfalls may not have the power to propel you into the country’s top 1% wealthiest individuals but if managed well, can have a positive effect on the realization of your financial goals.
Top 5 Tips for Managing a Financial Windfall
Here are a couple of tips that can come in handy when you do receive unexpected cash.
Take a Step Back
Everyone, from the homeless to multi-billionaires, has things they would urgently want to do if they had more money. Some of these may be good smart financial decisions while others are best classified as wasteful consumption. To make sure you put the money into something you won’t regret, take a step back, pause and evaluate your options.
If you already have bad spending habits, the money may end up exacerbating the problem. Impulsive spending is the principal reason windfalls are wasted. Before you rush to buy a new car, book a costly overseas vacation or purchase an expensive pair of designer shoes, make sure each use of the cash is good for your short, medium and long-term financial goals.
Some people go on a spending spree and end up in debt because they overestimated their good fortune.
Resolve Emergencies First
You have wants, you have needs, and then you have emergencies. There are many things you can spend your money on but there are some that cannot wait.
For instance, if you have completely exhausted your savings and have fallen several repayments behind on your mortgage, this should be the first thing you spend the windfall on. The alternative is losing your home, a prospect that you’d probably not want to contemplate. Another example of an emergency is a hospital bill or long overdue medical procedure.
It is only after you’ve tackled the emergencies should you start to explore other ways you can put the money to good use.
Invest for the Long-term
It’s never too early to start laying down financial plans for the future. That’s why at least some part of the windfall should go toward your long-term goals such as retirement and your children’s education.
Invest the money in Treasuries, equities, and unit trusts. Anyone can invest in these assets but not everyone has the experience or financial knowledge to make smart investment decisions. To avoid losing money, it’s best to seek the assistance of an investment advisor. You’ll certainly receive an invoice for the service (download an invoice template) but it will be well worth it.
There’s plenty of things you can spend the money on. But that doesn’t mean you have to. As you deal with your current emergencies, think about future ones. You might spend or invest all the money and then immediately thereafter be faced with a pressing need that you must take care of urgently.
It would be prudent to use the windfall to revive or pad your savings account. At the minimum, ensure you’ve set aside enough cash to cover your living expenses for the next three to six months just in case you lose your primary source of income.
It’s hard to go wrong with bolstering savings. If nothing else, it gives you peace of mind that if a sudden financial need were to come up, you’ll not be caught flat-footed.
Have Some Fun
We’ve all heard of the problems that come with living a life entirely consumed by work and with no time for play. There’s nothing wrong with treating yourself a little to celebrate your good luck.
As long as it is done with reasonable moderation, letting your hair down does more good than harm to your long-term financial health. It reignites your enthusiasm for life and with it, your drive to succeed. It could be as little as going for dinner or visiting a sauna.
Financial windfalls can slip between your fingers as quickly as they came. These tips can help you make the sudden inflow of cash work for you.