At one time or another, most of us will get some unexpected money. It could be anything from Wednesday evening’s $700 million Powerball drawing to a tax refund, inheritance, work-related bonus or pull of a slot machine. Sooner or later, into every life some unexpected money (hopefully) will fall. And when it does, you’ll confront the most pleasant of conundrums — what to do next.
Here’s this week’s reader question:
What is the best way to deal with a large inheritance? Something that is well into the $400,000 to $850,000 range? Age is only in middle 50s. — Tina
Here’s what to do, Tina, step by step.
1. Say nothing, do nothing
Don’t do anything at first: No shopping sprees, no donations to charity, no lending money to friends and family. Don’t even tell anyone. The last thing you want to do is risk wasting your windfall by acting on impulse, or encouraging friends or distant relatives to hold their hands out.
The greater the sum, the longer you should take to assess your financial situation and identify some short- and long-term goals. If the amount is significant, a month isn’t too long to wait. The money’s not going anywhere.
2. Define your goals
Most of us have a vague idea of what we want from life. Now’s a great time to turn those vague thoughts into an action plan by establishing specific goals.
One way to approach goal-setting is to imagine yourself on your deathbed. As your life passes before you, what would you be thinking about? Unless you’re as shallow as a puddle, you probably would be thinking a lot more about the times you had than the things you valued. You’d likely be remembering the people you touched and who touched you.
When you’re able to wrap your mind around the things in life that truly make you happy, all that’s left is to use your resources — both time and money — to bring more of those things into your life.
For example, if helping your kids brings you fulfillment, make it a goal that within X years, you’ll have saved X amount to help with things like college. If charitable work does it for you, make it a goal to donate X dollars by X date. If seeing the world is your dream, decide when you’re leaving and exactly how much of your resources you’ll use. If you love laughing with your spouse, make it goal to retire in X years with X dollars so you can spend more time together.
Once you know what you want, you’re better prepared to point your time and money in that direction and avoid getting sidetracked by other things.
There’s no limit to the goals you might have, and there’s no shame in putting things like a nice house, car or other material possessions on your list. But no matter where you want to end up, the shortest route is to decide in advance where you’re going.
3. Remove the roadblocks
Once you’ve established some financial goals, start removing the impediments to reaching them. One of the worst is debt.
If you have debt, especially the high-interest kind, pay it off. If you’re paying 20 percent interest on a credit card, paying it off is like earning 20 percent, tax-free and risk-free. That’s better than any investment you’re likely to find. So paying off debts, especially the high-interest kind, will make you richer and thus put you in a position to reach your goals faster.
There are instances in which paying down debt makes less sense. For example, if you’re paying 3 percent on a mortgage and can earn 8 percent in the stock market, you’ll obviously come out ahead by leaving your debt intact. But in general, debt is a monster that devours your available resources and puts you farther from the finish line. Destroy it with a windfall, or any other way you can.
4. Grow the rest
If you’re fortunate enough to inherit $850,000, one cool thing to do with it is to make it into $1.7 million. How? By investing it. If you’re not sure what to do, now’s the time for a little research. Check out articles like “How Do I Invest in the Stock Market?” for tips, including:
- Don’t be a dope: Day trading, penny stocks and buying based on rumors are sucker bets.
- Don’t put all your eggs in one basket: Diversify: stocks, real estate — maybe even turning a hobby into a business. Spread it around.
- Kiss the money goodbye for a while: One of the luxuries of a windfall is it allows you to invest longer-term without worry. Things like stocks and real estate take time to blossom. A windfall buys you that time.
That is, provided you:
5. Expect the unexpected
The only thing that’s certain in life is that nothing is certain. Always keep some powder dry. If you put all of your money into things that fluctuate in value, like stocks or real estate, and then need the money, you could be forced to sell at the worst possible time.
Your emergency savings go in a bank or money market fund. These accounts will pay nearly nothing, which can be discouraging, but it’s better than being forced to fire-sale illiquid investments. Don’t think of these savings as a wasted opportunity. Think of them as what they are: an insurance policy.
Always have at least six months’ living expenses in your emergency fund. A year’s worth would be better.
6. Seek expert advice
It’s best to hire an expert if your windfall is of considerable size. Interview several financial advisers who are paid by the hour — never by commission. And don’t ever deal with anyone without checking their credentials.
Ask friends for referrals, check the National Association of Personal Financial Advisors, preferably both.
And don’t ever simply turn money over to someone else and forget about it. Helping you understand your investments is a professional’s job. Being responsible for your own money is yours.
7. Enjoy yourself
Last, but definitely not least, use some of your money to treat yourself to a great experience, like a trip to a place you’ve always wanted to see. One of the main reasons to have money is to enjoy it.
Obviously, the weight you’ll put on the steps above will depend largely on the amount of your windfall. Inheriting $400,000 is different from getting a $2,000 bonus at work. But the principle is the same: Take your time, think it through and decide how best to use the money to get the things you want from life.
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I founded Money Talks News in 1991. I’m a CPA, and over the years I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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