Yo! My editor Ariel brought this topic to my attention a few weeks ago and I decided that it would be a great topic to bring to M$M. Since she has recently had experience with the subject, I wanted her to share her story and advice in her own words. Enjoy!
Over the past year and a half, I have been quietly pondering and researching what people call “windfalls” – a term defined as sudden, unexpected financial gains. I’m not necessarily talking about winning the lottery, but the advice I’m offering about what to do when you receive a financial windfall would still apply. I want to talk more specifically about what millennials, like myself, will do as our aging parents inevitably pass away, leaving some of us with an unanticipated chunk of money.
Before I go on, it’s important for you to know that I am not a financial advisor, but someone who has recently (just over a year ago) received such a windfall, hence the reason for spending so much time researching the subject. My Dad passed away, leaving me as the sole beneficiary of his estate. Since he wasn’t wealthy, the word “estate” sounds a little misleading, despite the legal meaning of the term, but his small property – my childhood home – was paid off, leading me to profit from the sale when the time came. Beyond that, he had no other assets, no amassed fortune, no cache of gold buried in the backyard.
This type of situation, and deciding what to what to do when you receive a financial windfall, is something that more and more of us millennials will face in the coming decades. The $30 trillion wealth transfer that has started to happen, from our aging baby boomer parents to those of us classified as millennials and Gen-Xers, is making news in more than just terms of what we’re going to do with it.
Brokerage firms and wealth advisors are talking about how they will deal with an influx of investors, who are considerably more comfortable with robo-advisors overseeing assets that were previously held in actively managed accounts. Point being, this unprecedented wealth transfer, deserves some attention here on M$M.
Here’s what to do when you receive a financial windfall:
1. Take your time and think about your priorities and goals
A windfall can be any amount of money, no matter how large or small. You could even use this advice to think about your options after you receive a work bonus or larger-than-expected tax return. Really, any unexpected amount of money deserves thoughtful research and introspection.
Time helps you understand what your priorities and goals are, stopping you from blowing everything on yarn and Swedish clogs… probably just me thinking that.
You will want to think about the best ways to use that money, what it means for your long and short term goals, and how to protect that money in the interim.
2. Protect your money while you think
One of the smartest things my husband and I did was to open a dedicated money market account, that came with a high APR, to put that money in while we weighed out the options.
If you hope to use the money sooner than later, you will probably want to keep it as liquid as possible, but not to the point that you’re stashing stacks of cash under your mattress. Having a dedicated bank account helped my family, but even setting it aside in your savings account might be the right option for you.
Ideally, you’ll want to have easy access to that money to use as you see fit while not having too much access, like a checking/debit account that will allow you to spend freely.
3. Consult with experts
While we crunched the numbers on our own, there is a benefit to finding trusted advisors to help you decide what to do when you receive a financial windfall. They can help you decide how to allocate your money, determine your goals, and set up any accounts you need to protect and grow your money.
There are wealth advisors, financial planners, and the like that are paid to help you achieve your financial goals. But, be wary of anyone who tries to sell you something. The influx of ignorant, young investors could potentially lead to money hungry advisors (non fiduciaries), who aren’t looking out your for your best interest. Ultimately, this is your money, and you should decide how you use it.
4. Think about your debt
If you’re similar to millennials like myself, you have likely amassed some serious student loan debt, maybe a mortgage, and/or credit card debt. While my husband and I didn’t have the latter, we did have a mortgage and student loan debt. I know that I may catch some flack for this, but we choose to use the majority of my father’s estate to pay off our mortgage.
This was a well thought out decision that we came to after realizing that my goal was to try to become fully self-employed. Knowing that student loans could be deferred in times of economic hardship while a mortgage could not, we felt this was the smartest decision for our situation.
Really though, if you have debt, deciding what to do when you receive a financial windfall and utilizing it to pay off that debt will likely help ease some financial strain and stress as you move forward. Once your debt is taken care of, you will have one (or more) fewer bills to pay, allowing you to put more energy towards investing, retirement, etc.
M$M tip: You can read how my experience with loss shaped the way I live now at The Real Reason I Live Debt Free.
5. See if your emergency fund needs some attention
I’d say that the last step, this one, and the next, are equally important and can be approached in whatever order you like, depending on whose advice you follow.
After going years without an emergency fund and feeling the consequences of that risky lifestyle – think relying on credit cards to cover inevitable and unexpected expenses – we knew that we needed to have more set aside. It was also important knowing that I was going to be self-employed.
The rule of thumb with emergency funds is that you should set aside three to six months of income. This will protect you from adding to your debt, and honestly, that peace of mind is an incredible feeling.
Having an emergency fund, especially one that came from the type of windfall I received, has made me considerably more responsible with my spending. I just don’t want to touch that money in our emergency fund unless I absolutely have to.
6. Think about your long-term financial goals
Investing or preparing for retirement, along with any number of long-term goals, should be at the top of your mind as you decide what to do when you receive a financial windfall. If you’re smart about it, you are ensuring a less stressful financial future, even potentially allowing your children the same benefit allowed to you. It also means you’ll be able to focus on other financial objectives, like charitable and long-term giving.
Protecting your future could be starting an IRA if you don’t have one yet, making the full year contribution if you do have one, contributing to other types of retirement accounts, investing in the stock market, and even protecting money in a trust, if that’s your sort of thing.
Before making any big financial decisions for your future, you’ll need to sit down and figure out what your goals are. This is easier if you’ve given yourself some time, in the beginning, even meeting with a trusted advisor to help you map things out.
If you’re wondering, my husband and I did use some of our money to put towards retirement. Not as much as we allocated for other things since we looked at all of the options and understood the best outcomes for our unique situation – remember, personal finance is personal.
7. Update your will or estate plan
As I’m writing this, I’m reminded that this is still something we need to do. When you have a sudden, unexpected financial gain, it will have further implications on what happens when you pass, also a reminder that this is the natural cycle of things. And, knowing how your parents did or didn’t handle their own estate may inform you as to what you do with yours.
Even something like putting POD (payable-on-death) on your bank accounts, or TOD (transfer-on-death) on the deed to your house can be a step you take to ensure a smooth and easy transfer of assets.
8. Don’t fall for a lifestyle upgrade
Knowing that you have some extra money in the bank, debts paid off, and money invested for the future doesn’t mean that you should ignore your current good financial habits. I mean, it may change the amount you have to work with, but don’t blow it on a bunch of little extras.
This, unfortunately, is too easy to do when you feel protected in some sense. I’ve found that remembering where that money came from helps me stay focused on what our goals were pre-windfall.
I will admit that we do occasionally go out to eat a little more and decided to prioritize a yearly family vacation, but that’s after acknowledging that we’d like to stay mortgage free and still shopping at thrift stores as much as possible. We even recently needed to buy a new car, and while I would have loved this, we opted for a 20-year-old version with really low miles. That saved us from a massive car payment, plus I knew it would make Bobby proud – ha!
9. Know that it’s okay to splurge a little
This might sound counterintuitive to that last piece of advice, but when you are so focused on building a healthy financial future, even prior to your windfall, it’s really easy to become nearly threadbare, so stressed that you’re unable to enjoy life. I’d say that as long as you’re being as responsible as possible, it’s okay to spend a little money on yourself.
My Dad was very sick during the eight months leading up to his passing. There were chemo and radiation; a blood infection that meant he was living with us for weeks, administering twice daily antibiotic infusions via IV; and living in constant state of uncertainty, not knowing when his last day would be. That isn’t the case for all millennials, but often the impending death of a parent produces a certain amount of stress that really does take a toll on your mental health. Spending a little on yourself might, in the short term at least, help you deal with some amount of exhaustion and grief. Also, if you are struggling with a loss, don’t forget that it’s okay to ask for help.
My Dad loved to travel, but didn’t do enough of it and always wanted my family to do more. So, as we thought on what to do when you receive a financial windfall, we knew we needed to spend a portion of ours on an overdue family vacation. We took two weeks to travel to the Pacific Northwest where we tried our best to recover a little after a traumatic year. We came home refreshed and refocused, knowing that it was our duty to continue spending and saving as we had.
Depending on what your windfall looks like, your splurge could be something small like buying that dreamy pair of Swedish clogs or skein of cashmere yarn that you’ve always wanted… realizing again that this is just me. Just know that it is okay to spend something on yourself when you’re also taking positive steps to keep your financial well-being in check.
10. Don’t tell everyone about your windfall
Instead of what to do when you receive a financial windfall, this falls under what not to do. I realize I’m going against this point in telling you about my personal experience, but I am a big believer in relating experiences when they may help others.
Telling others about your inheritance, bonus, even lottery winnings can produce any number of reactions. From, “hey, Mom didn’t leave me that much!” to “wait… you’re doing what with that money!?” I’m honestly less concerned about the pleas for financial help and more with opening myself up for judgment and anger.
If you do choose to talk about your windfall, be mindful of what you say. While I no longer buy into the advice that all money talks are taboo, I do understand the ramifications of oversharing. Just be careful with who you share this with, don’t be braggy, and use your experience to help others.