What To Do With a Windfall: Managing Sudden Wealth
Posted on May 30, 2024 by Katherine Fox.
What To Do With a Windfall: Managing Sudden Wealth
You know a windfall is coming your way.
You might have won the lottery, received notice of a major settlement, or be about to receive an inheritance.
At this point, you probably have more questions than answers.
How do I keep this money safe?
Should I tell people about this money?
What am I going to spend this money on?
How should I invest this money?
That’s why I’m here. I’ve got the details you need to understand how to build a plan to manage sudden wealth and use it to support your life goals, whatever they are.
I’m Katherine and I’m a CFP® and investment advisor for inheritors and other sudden wealth recipients.
I’m here to help you through this journey, whatever your needs are.
If you’re trying to get up to speed, check out the 20 Terms Inheritors Need to Know.
And if you’re deep in the weeds and don’t know what to do next, schedule a FREE consultation to see how I can help you navigate your sudden wealth situation.
What is the first thing you should do after getting a windfall?
In a word, nothing.
Seriously.
I want you to literally sit on your hands.
The biggest way windfalls are wasted is when people see the money in their bank account and start spending.
They buy expensive things and things that are expensive to maintain.
They burn through money like it's going out of style. Then, they’re left with nothing.
After getting a windfall I want you to write down answers to these questions:
What do I want to spend this money on now?
In five years, what do I want my life to look like?
In ten years, what do I want my life to look like?
In 30 years, what do I want my life to look like?
Look at your answers. Does what you want to spend money on now align with your life goals in 30 years?
If you want to buy a huge new house now, but your goal is to retire in 5 years - will the expense of the house prevent you from reaching that goal?
The first step after receiving sudden wealth is to think about what you want from your life and how this money can help you get there. Focus on a long-term view, not the instant gratification you could get from making purchases now.
What To Do With a Windfall: Managing Sudden Wealth
After receiving sudden wealth, you’re going to want to put a team of experts together to help you navigate your path forward.
What professionals do I need to help me manage sudden new wealth?
Your needs will vary depending on the type of windfall you received and your comfort level with managing a large windfall. Many recipients of new wealth will include these professionals on their team:
Fee-only, fiduciary financial planner
You don’t need someone whose initial focus is on investing your new wealth. Look for a fiduciary, fee-only financial planner who can help you build a plan to align your new wealth with your values and your long-term goals. This advisor can also serve as the coordinator of your team of other professionals, so you aren’t responsible for relaying information between a CPA, attorney, and advisor.
Accountant/CPA
Sudden wealth often comes with tax implications. You will want to involve an accountant early on in this process to help understand your tax obligations and what strategies may be available to reduce your overall tax liability. Focus on finding a CPA who has experience working with sudden wealth recipients in your specific situation.
Estate planning attorney
You will want to put legal structures in place to ensure your new wealth passes appropriately and is protected after you die. An attorney is usually a later addition to your sudden wealth team, but they provide essential advice to help you understand how you want to legally structure your sudden wealth and if it is appropriate for you to use advanced estate planning strategies to protect your heirs and reduce your estate tax exposure.
Insurance broker
Your financial planner should be able to refer you to a non-captive insurance broker to provide guidance on increasing your personal property and liability coverage after receiving a windfall. Depending on the amount you received, this person (in conjunction with your attorney) may be able to advise on advanced life insurance planning strategies
When interviewing professionals, start by asking these questions:
What is your experience dealing with people in my specific situation?
Do you have experience helping clients with the tax/legal codes in my state?
How are you compensated? How does that compensation change depending on how much help I need?
What control, if any, will you have over my wealth?
Can you provide references from current clients?
What other types of professionals should I be working with?
How should I manage a sudden large amount of wealth?
At Sunnybranch, I’m all about practicality.
When you’re ready to start actively managing your sudden wealth, the first thing you need to do is get that money in a safe place where it can earn interest.
If you received more than $250,000 you should look at an online bank that can provide interest payments and FDIC insurance on amounts above $250,000.
At Sunnybranch, I partner with Stonecastle to give my clients access to FDIC-insured accounts on cash values up to $25 million, currently paying almost 5% interest.
Once your money is safely parked in an FDIC-insured, interest-bearing account, its time to start building a team of professionals to help manage your windfall.
How should I invest sudden wealth?
How you invest sudden wealth is an intensely personal question.
There is no one “right” way to make the most of a windfall.
What you should do is sort your goals into short, medium, and long-term buckets.
Short term goals are in the next 1-3 years.
Medium term goals are in the next 3-5 years.
Long term goals are in the next 5+ years.
Once you’ve done that, assign a rough number value to each goal (if you can’t do this yourself, it’s time to hire that fiduciary, fee-only financial planner I recommended above).
After you do this, you will have a rough idea of how much of your windfall should be invested in the short, medium, and long-term buckets.
Short term investments should be held:
FDIC insured, high-yield savings account.
You don’t want to subject cash that is needed soon to potential market volatility.
Medium term investments can be held:
FDIC insured, high-yield savings account.
Money market fund
Bonds/bond funds
In the stock market, if the timing of the goal is flexible
Long term investments should be held:
In an appropriately diversified investment portfolio customized to your personal risk tolerance.
This portfolio should be balanced between stocks and bonds and have exposure to companies of different sizes across the world.
This portfolio should be focused on investing in line with your values.
Need help figuring out how this advice applies to your situation? Schedule a FREE call with me to discuss your situation, your needs, and where you’re getting stuck.
How can I align a sudden wealth windfall with my values?
One of the greatest areas I see sudden wealth recipients struggle is understanding who they are and their place in society after receiving a windfall.
This is especially true for people who:
Worked hard for what they have
Are comfortable with their life and community
Resent wealthy people who don’t give back
Identify as being scrappy or entrepreneurial
Having more money doesn’t make you a different person.
It doesn’t change your values.
It doesn’t need to change your lifestyle.
In addition to writing down their five, ten, and 30-year goals I tell my clients who receive sudden wealth to make a list of their key values.
For me, that looks like this:
Family
Physical movement
Community
Independence
Exploration
In addition to these values, I feel a strong obligation to give back and believe that being wealthy confers an obligation to push yourself to create positive impact within society.
If I were building a plan to manage sudden wealth, my purchasing and investment decisions should align with these values.
For example:
Family values for sudden wealth:
Fund 529 accounts for my children’s higher education
Share age-apprioriate details with my children about family wealth
Not making purchases/investments that would reduce the time my family spends together
Giving back: Support families in my community who are struggling to provide for their children’s education, especially children with disabilities.
Physical movement values for sudden wealth:
Increasing the time I have available to run, swim, lift weights, and hike
Focus on creating time for family exploration, both close to home and when traveling
Explore new ways to spend time outdoors
Giving back: support organizations that work to get marginalized groups (especially BIPOC and LGBTQIA+) access and familiarities with the outdoors
Community values for sudden wealth:
Build a lifestyle that allows me to spend time with my community
Maintain relationships with my original community, don’t get drawn into a more wealthy/entitled sphere of people
Giving back: Support community members who are unable to purchase homes or find stable housing.
Independence values for sudden wealth:
Build a lifestyle and income stream that allows me and my family to be free of time demands from bosses/external people
Don’t conform to expectations of “what wealthy people should do”
Focus on living my values
Giving back: I don’t know what this value means in the context of giving back - to explore more!
Exploration values for sudden wealth:
Increase the amount of time me and my family spend traveling
Look for new ways to explore and learn, at home and abroad
Giving back: fund travel experiences for traditionally marginalized communities
These values would guide my purchasing, giving, and investment decisions in any sudden wealth situation.
What would yours look like?
Let’s take the next step together
Understanding what to do with a sudden windfall is not easy. The newly wealthy can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms You Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a fiduciary, fee-only financial planner to learn how Sunnybranch can help you build a plan to manage, grow, and give your sudden wealth.