Striking it rich in the lottery seems like a ticket to endless freedom. But too often, lottery winners find themselves right back where they started, losing it all in a few short years.
A lack of strategy for sustaining wealth led many winners to spend recklessly instead of securing their financial future.
Windfalls can come from multiple sources: winnings, inheritance, settlements from a lawsuit. Although these gains often hinge on luck and aren’t something to rely on, planning ahead can turn these windfalls into lasting resources, building a stronger financial foundation for the future.
Give Yourself Time to Absorb Your Good Fortune
The excitement of a windfall can be overwhelming. Taking a few days or weeks to absorb the news before acting can help ensure thoughtful choices moving forward.
When a windfall of money is made public, it often leads to a surge of requests from distant relatives and old acquaintances. Although generosity is a virtue, unrestrained giving can deplete wealth faster than expected.
Even with the best intentions to assist others, it’s important to first allocate funds toward your own goals, ensuring that any contributions made don’t undermine your own long-term financial stability.
While helping others who may have fallen on hard times feels good, it’s beneficial to wait until you’ve had time to plan your priorities. Even when assisting others, it can be beneficial to keep the full scope of your windfall private. Money can change the dynamics of relationships. It’s your financial status—you don’t owe anyone the full picture.
As a general guideline, limit sharing the news to only those who truly need to know, until you have had time to adjust to your newfound wealth. That group should be kept small.
Calculate for Taxes
Remember, the number on the check isn’t the final amount you’ll receive. Uncle Sam will get his cut.
Even Joker didn’t want to mess with the IRS. For good reason: After all, it was the agency that brought down Al Capone when no one else could.
A good first step is understanding how tax brackets work.
Each tax bracket applies a specific rate only to the income that falls within it, not your entire income. This assumes, of course, that you’re not eligible for any tax deductions. Most people are, even if it’s just claiming themselves as a dependent.
For instance, the tax rate is 10% on the first $11,000 of taxable income after deductions which means that everyone pays $1,100 on the first $11,000 of their taxable income, regardless of how much they make.
The 12% tax bracket at $11,001 to $44,725 only applies to that level. Someone making $30,000 a year will pay 12% on $18,999 of their income, because the first $11,000 is taxed at 10%.
Tax codes are complex and detailed. When in doubt, it’s wise to consult a skilled tax accountant. Many individuals who came into windfalls of money, whether through inheritance or successful business ventures, managed to preserve their wealth by working with an expert who could help them navigate the complexities of the tax code.
Understanding all relevant deductions and tax codes can save thousands, if not more. Conversely, errors in tax filings due to a lack of knowledge about these complexities can result in significant financial penalties.
Take Care of Household, Vehicle, or Life Tasks
For homeowners, there’s often a long list of nagging issues that have been put off for years, if not decades. From repairing the roof to upgrading outdated plumbing or rewiring an old house, these tasks often get pushed aside due to their high costs and the extensive work required.
With extra funds, it’s a perfect opportunity to replace that carpet you’ve never liked, update outdated appliances, or finally give your kitchen the remodel you’ve always envisioned.
These are investments for the future, ones that you will never regret. These types of upgrades also improve your property value and safeguard against future pricey incidents likes pipes bursting or wiring related fires.
If you are making updates to your home, such as replacing windows or central heat, check for tax rebates from the federal government for green energy upgrades. Not only will these lower the cost of the upgrades themselves, but they can also lower your utility bill in the long run.
Related: Homeowners Miss Up to $22,000 in Home Energy Efficiency Tax Rebates
Pay Off Debts
Debt happens even to people who are pretty good at handling money.
Whether it’s a mortgage, a car loan, or credit cards, debt can pile up quickly. Now, with the opportunity to pay it off, you can relieve that financial burden and focus on your next steps with greater peace of mind.
Paying off debt, especially high interest debt, reduces the overall amount paid to the creditor in interest paid. This means less paid out to others in the long run, and in effect, more money in your pocket.
This will likely be even more important if the source of the windfall of money is a lawsuit settlement. Most of the settlement will likely be used to recover from the situation from which the lawsuit stemmed, such as paying off medical bills or replacing lost property.
Once those expenses are covered, there may not be much left. Getting an idea of what, if any, will be left over can prevent overestimating how far the funds will go.
Related: Americans Have Over $1.1 Trillion in Credit Card Debt
Create a Rainy Day Fund
Life can throw a curveball just as easily as it gives a break—maybe even more easily.
This makes it crucial to set aside some cash for life’s unexpected twists. Whether from a windfall or regular savings, a good rule of thumb is to have enough to cover your basic bills for six months in case the unexpected happens, like a job loss.
When a windfall isn’t needed to pay off debts, it opens the door to increasing savings. This provides greater flexibility in the event of a worst-case scenario and opens up more options for a potential change of scenery.
Invest in Solid Opportunities
Allocating some of the funds into investments can help your windfall grow and fortify your financial future.
With investing, there is always a risk vs. reward equation.
Relatively low-risk investments, at least, historically, include index funds, government bonds, stable dividend stocks, or a high-yield CD.
For more potential upside there are high-risk investment classes like crypto, and growth stocks. While these assets have higher potential upside, they also have higher potential downside. There is a risk-reward trade off.
The key is to invest only what one can afford to leave untouched for an extended period, even if the markets take a downturn.
Allocate a Fun Budget
Easy there: It should only be a small portion, and only if there are leftovers after paying off debts and priority goals.
Many individuals who went broke after a windfall of money often overspent on vices or luxury goods, but that doesn’t mean fun money should be off the table entirely. Adding some discretionary spending to the budget is possible without overindulging.
By prioritizing the other steps on this list, such as renovating your home and paying off debts, even if the windfall of money eventually runs out, those investments will continue to positively impact your financial stability.
These investments ensure that you won’t revert to the same financial situation you were in before the windfall, and may even prevent future unexpected expenses, and lower your total debt obligations by curtailing interest acculumation.
Disclaimer: This article is for informational purposes only and does not constitute financial advice.
