How to Financially Prepare for a Windfall

A windfall can be a significant opportunity for financial planning. Windfalls can come in many forms: selling a business or real estate, receiving an inheritance, settling an insurance suit, obtaining a large bonus, or receiving a pension in a lump sum. Here are the financial planning implications to receiving a windfall:

The first step is to reassess your current financial plan and where you stand. How does this windfall affect your financial life? Is it significant enough for you to make meaningful changes in your life now or in the near future?

The next step is to replenish your emergency savings. The best emergency savings fund have somewhere between 3-6 months worth of all necessary expenses.

After you've topped off savings, consider tax planning opportunities. To start, you must set aside an appropriate amount of money to pay taxes on any windfall received. Additionally, you may be able to max out retirement or HSA plans to reduce taxable income. Donating to charity may also be a good way to offset an increase in taxes from a windfall.

The next step is to consider spending! Usually, we like to consider spending before any other aspects of our financial plan. It is important to pause and take care of all your other financial needs prior to spending any amount from your windfall. I recommend keeping spending to 10% or less of the after-tax amount, that way you can enjoy your newfound money while balancing your future needs.

Lastly, make sure you put the rest of your windfall into long term savings (bitcoin) and/or a diversified portfolio of investments. If you have high interest debt, using your windfall to pay it down (or off!) can significantly reduce your interest expenses.

As always, it's always best to consult a financial planner if you're unsure what to do with your windfall.