A Tisket, A Tasket, A Windfall In My Basket

A lot of people daydream about winning the lottery, even those of us who never buy a ticket. But like many windfalls, lottery winners often have had a hard time holding on to it. Before we shake our heads at them, let’s see if we’re without sin. Have you held on to your tax refund (which you shouldn’t be getting if you’ve planned correctly, but that’s another matter)? How about that $50 you got as a rebate? The work bonus? An inheritance? Your most recent raise? Ahem.

Wealth is not what you make, it’s what you manage to hold on to. It’s the rare person who dreams about a windfall and thinks to themselves, boy, I can’t wait to invest that! If so, my guess is your profession is either 1) financial planner or 2) actuary. But let’s say you’re a normal person, what should you do? Of course, it depends on the amount (really, $50 is a little different than $500,000), but here’s my advice:

 1.    If it’s a large amount, park it in an on-line savings account, or CD, or some other safe place for at least 3 months until you get used to the idea. What’s a large amount? Anything where your first thought is OMG. You need time to calm down and think straight.

 2.    AT A MINIMUM, save half. Ideally, I’d like to see you save 50%, pay off debts with 40%, and spend no more than 10%. If you don’t have any debts, I’m okay with that 40% going to a long term, needed goal (kid’s education, home repairs, etc.). I’d still rather see you invest it.

 Then what?

I’d do the following, in the following order. If one is already complete, move on to the next. This applies whether it’s $50 or $50,000. (Legal disclaimer: please see a professional who can advise on your individual situation. The following is intended as general guidelines only, and no specific recommendations are intended.)

  • Create or top off your emergency fund so that it’s at least 3 months’ worth of living expenses. Better if it’s 6 months.
  •  Pay off consumer debt. DON’T pay off unless you have an emergency fund, or when the next emergency happens, you’ll just put it on the credit card. This is an ideal method to never get out of debt
  • Invest in a IRA or Roth if you’re eligible
  • If you’re not eligible, invest at least the same amount in mutual funds (or, preferably, that 50%) so you build an investment nest egg.
  • If you still have some of that 40% left, pay off student loans. No student loans? Pay down the principal of your mortgage.
  • Invest in yourself. Get some decent, fee-only advice from someone who won’t sell you a bunch of crap, get savvy tax advice, and nail a good estate attorney to update your documents. Once you’ve got a reliable team working for you, get more education—I don’t care if it’s knitting or an MBA, knowledge is something no one can take away from you, no matter what the market. Consider career counseling. Ignore no-money-down seminars for buying real estate, day trading schemes, and all the other garbage that makes money for the seminar leaders and no one else.
  •  Invest. Educate yourself so you know what you’re doing, and only invest when you understand the reasons for the investment, how you will make money, and what the costs are.
  • Give something to charity. You’ll feel way better about yourself. If you live in the U.S., you’re already wealthier than most of the world. Check out Peter Singer’s website for guidelines on reasonable giving.
  • Make improvements to your home, but only if it will increase the value or repair something that’s really falling apart. This would NOT include a hot tub, pool, or Sub-zero refrigerator.
  • Blow a little. A LITTLE! Max 10%
  • Maybe consider the pleas of your deadbeat relatives.

So now I’ve covered how you should spend your tax refund, your raise, and the money you inherited from your aunt in Azerbaijan. Call me if you win the lottery. In fact, maybe you should call me even if you don’t! And, good luck!

About the author

Danielle L. Schultz, CFP®, CDFA

Danielle L. Schultz, the principal financial planner of Haven Financial Solutions, is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a NAPFA-registered Financial Advisor, and a Registered Investment Advisor in the State of Illinois. She studied financial planning at Northwestern University’s Certified Financial Planner™ certification program. She also holds a Series 65 license (Registered Investment Advisor Representative) and a CCPS (Certified College Planning Specialist).

She writes a regular column for Better Investing magazine and is currently working on a revision of their mutual funds handbook. In addition to academic training and professional experience, Ms. Schultz has personally managed Social Security, Medicare, retirement and long-term care issues; college funding concerns; and cash flow and transition planning in self-employment and divorce situations. Her social work background gives her an innovative perspective on financial planning issues; for her, financial planning is not only about money, but also a key component in a satisfying and well-lived life.

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