Most of us dream of striking it rich with a financial windfall like winning the lottery. Whatever the circumstances that give rise to a source of new money, it’s more important to make sound financial decisions and avoid pitfalls.
Millennials getting their first signing bonus or receiving an inheritance are especially vulnerable to sudden money concerns because they are still forming wise money habits. Here are 7 steps to help manage through a windfall whatever the age of the recipient or the amount.
Catch your breath.
When money unexpectedly lines your pockets, it’s tempting to think about quitting a job or making a major purchase. But those would be dangerous moves if you didn’t fully understand the limits of your new money. That’s why it’s important to have a cooling off period of six to 12 months before taking any action. During that time, it may pay big dividends to park the new money in a relatively safe investment, such as a certificate of deposit or a money market account.
Think long term.
Think of your windfall as a lifelong asset that will help you build a secure financial foundation. Whatever the size of a windfall, if you think about it as a long-term asset, it will help you ensure that the extra cash is still there to help you over your lifetime.
To do that, you need to put your emotions on hold and come up with a plan to manage this new found money for the long haul.
Get a handle on your current financial situation. Take stock of your personal and financial documents, including monthly bills, bank statements, retirement accounts, investment statements, credit card bills and loan documents. When that’s done, assess what you have, what you owe, the type of payment coming to you from the windfall and any other income you have to cover your daily expenses.
Reduce high-interest debts.
The phrase “put your money to work” doesn’t apply only to investing. Sometimes, the best thing to do with found money is to start paying off debt. If you use your windfall to erase your debt, you can save or invest the money you would have been paying in interest. Better for you to earn interest than pay it to someone else. Having a professional provide you with a Credit Analysis can go a long way to understanding and prioritizing existing debt.
Invest in your future.
Make a list of your financial goals and estimate how much each will cost. Want to go on a dream vacation? Pay off debt? Get a degree? Buy a house? Save for a child’s education? Make sure you don’t forget about something that might seem too obvious to include, like your retirement.
Consider assembling a team of advisors.
Plotting a savings or investment strategy isn’t always easy or intuitive, particularly if you’ve never done it before. Consider your financial institution, like MTC Federal, an accountant, and a financial planner to help you manage and achieve your goals.
Ask for recommendations from friends, family members or colleagues, especially those who have investing experience. Put the effort into doing your homework and always accept ownership of who you trust.
Protect your money.
Protect your money. Small or large windfalls can fall prey to fraud. Understand the warning signs of fraud and how to use money management tools to stay on top of any unauthorized transactions.
Whether you are receiving or transferring a windfall to someone, questions are bound to arise. In both cases, a stronger financial future is rewarding when simple well thought out plans come together. Let’s talk about the benefits of membership and your goals.