“What to Do When You Receive a Financial Windfall”

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What Is a Financial Windfall?

From finding a $20 bill in your coat pocket to receiving an unexpected bonus at work, financial windfalls can brighten your day. A financial windfall is money you didn’t anticipate receiving. These windfalls can range from hundreds to millions of dollars, offering a chance to enhance your financial situation. Let’s explore where financial windfalls come from and what to consider if you receive an unexpected sum of money.

Examples of a Financial Windfall

Financial windfalls can originate from various sources, including:

• Profit from selling a home or other property
• Employee bonuses
• Lottery or prize winnings
• Life insurance payouts
• Inheritance of money or property
• Exercising stock options
• Lawsuit settlements
• Tax refunds

What sets a financial windfall apart is its unexpected nature and its exclusion from your regular income and budget. While it can be a financial boon, it may also introduce new money management challenges.

How Much Money Is Considered a Windfall?

There’s no specific amount that defines a financial windfall. For a student with a low income, an unexpected $250 could be a windfall. The amount you consider a windfall will depend on your financial situation and perceptions.

What to Do With a Financial Windfall

Before you succumb to the urge to spend your windfall impulsively, take some time to consider the best uses for your newfound cash. Placing the money in a high-yield savings account can help you earn interest while you decide what to do with it.

Depending on the source and size of your windfall, here are some options to consider:

• Plan for any tax bills: Inheritances, prizes, and gains from selling property or stocks may be subject to various taxes. A tax adviser can help you determine what you’ll owe and how much to set aside.
• Pay down high-interest debt: Paying off credit card debt can lead to significant savings and potentially boost your credit score.
• Start or build your emergency fund: Aim to have three to six months’ worth of essential living expenses saved for emergencies.
• Increase contributions to retirement accounts: This can help build your nest egg and reduce your taxable income.
• Create a sinking fund: Save for big goals like a family vacation, a new car, or a down payment on a home.
• Save for your children’s education: Consider opening a 529 savings plan for their college funds.
• Invest the money: If you’ve maxed out retirement contributions, consider other investment vehicles to grow your wealth.
• Make a budget: A financial windfall can lead to lifestyle creep. A budget can help you manage your money wisely.
• Work with a financial professional: A financial advisor can help you minimize taxes and create a plan to achieve your financial goals.
• Revise your estate plan: Reflect your new financial situation in your estate plan and consider purchasing more life insurance.

The Bottom Line

It’s clear that a windfall of any size can significantly impact your finances, depending on how you use it. Good credit is also crucial. While reviewing your finances after a windfall, check your credit report and take steps to improve your credit score if necessary, such as using your windfall to pay down debt.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the most of your financial opportunities.

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