Six smart ways to manage sudden wealth

A young partner in a start-up firm once asked me “What do you suggest I do with the money if my company is sold and I get a lump sum?” It made me think. Accordingly this blog post.

Occasionally, you may find yourself receiving a fortune: whether it is from the startup firm you have been part of, or as an inheritance from your Mom or Dad or Uncle or Aunt, or even from the lottery you won. This is indeed great and perhaps will help you to boost your overall financial wellbeing.

However, you now have to manage the unexpected wealth efficiently and in line with your financial goals.  So, how do you do that? Here are six smart ways to manage such sudden wealth.

Pay off unwanted Debt

Debt itself is not bad in a sound financial plan. In fact, debt at favorable terms could open new opportunities to succeed financially. That said, debt where you pay high interest and debt that offers you little or no tax incentives, is a drain on your financial wellbeing. This is the “unwanted debt”. This is the debt you would want to pay off first if you have excess cash.

For example, unless you have some special deal, typical credit card loans and auto loans charge high interest rates and have no tax incentive whatsoever. So, easy decision: Pay off these loans first.

Student loans, mortgage loans, home equity loans could be a bit tricky. These are the loans that typically offer some tax breaks. Accordingly, the decision should be based on weighing the terms of the loan in light of the tax advantages they offer.

Increase your Emergency Fund

The purpose of Emergency Fund is to provide you financial means and peace of mind should you lose your income get into an Emergency situation. While how much you should target in such a fund is subjective and unique to your circumstances, many financial planning experts suggest a minimum of 4-6 months of living expenses towards such Emergency Fund.

Is this enough for you? Does this give you enough for the rainy day? What do you think? If you are not comfortable with 4-6 months of emergency funds, now is the time to increase the fund with the sudden wealth in your hand.

Jump-start 529 savings for your children

If you have not saved enough for your children’s college education until now, here is your opportunity to jump-start that financial goal without gift tax consequences.

Typically, contributions to a 529 plan are considered as gifts to the beneficiary. Accordingly, they are subject to the standard gift tax rules. However, there is one exception. The tax code allows you to jump-start future year contributions (up to 5 years) without triggering gift tax rules. What this means is: if you are married and have children, you and your spouse can put away up to ($140,000 * # of children) in college funds this year (2016) and not worry about gift tax consequences.

Isn’t this a great way to put some of your sudden wealth to good use? The money invested is gift tax-free, grows tax-free, and comes out tax-free when used for your child’s college education.

Give to charity

Many studies including this Harvard Business School paper indicate that giving to charity makes you feel better about yourself. Feeling better about yourself, in turn, could help you live much happier life.

Also, IRS recognizes charitable inclinations and allows you to take tax deductions when you donate. While the exact tax deductions could be limited based on the rules in this IRS Publication 526, the point is there is a financial benefit in charitable giving.

Accordingly, consider donating some of your fortunes to your favorite charity, live a happier life and in the process save money on taxes!

Save for your Retirement

No matter what your age is, if you want to stop working one day and live on what you have accumulated, you will need a nest egg to consume from. This is your Retirement Fund.

If you are already saving enough for Retirement, perhaps you can use your sudden wealth to boost your savings and Retire early. If you are not saving enough for Retirement, maybe your sudden wealth could provide you an opportunity to catch-up and help you retire at your desired age.

Yes, take that dream vacation

After all, vacations are supposed to rejuvenate your energies and make you more productive at work. Moreover, this is the vacation you have been dreaming of and putting away because you do not have enough cash.

So, yes, it is perfectly acceptable thought to spend a portion of your lump sum towards that dream vacation of yours! Have fun!


So, what you think? You have enough food for thought for what to do with the sudden cash in your hand? No matter what you do, do not spend it all away. Have a plan and execute the plan. Good luck!

The post Six smart ways to manage sudden wealth appeared first on Unique Financial Advisors.

About the author

Vid Ponnapalli, MS, CFP®, MPAS®,CRPC®

I am a Fee-only financial advisor dedicated to working with individuals and families that are keen or organizing their financial life. I believe today’s financial planning need is under-served by traditional financial planning methods, mainly due to minimum income or net worth levels requirements. My goal is to contribute and change this paradigm. So, after a 20+ years career in financial services industry, I launched Unique Financial Advisors in 2014. I am eager to guide you through life’s financial decisions!

I am a CERTIFIED FINANCIAL PLANNER™ practitioner with an MS in Personal Financial Planning. I hold Master Planner Advanced Studies (MPAS®) and Chartered Retirement Planning Counselor (CRPC®) designations. I am a current active member of:

NAPFA (country's leading professional association of Fee-Only financial advisors)
FPA ( Financial Planning Association)
XYPN (A Financial Planners network focused on Generation X and Generation Y clients)

“My Mission is to help you achieve financial security by providing Fee-Only Financial Planning services with a relentless focus on Personal Attention and Trust.”

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My wonderful wife, Maha and I live in Holmdel, NJ. Our three young boys are on their path to settling down in life. When I am not working on Financial Planning, I enjoy hiking, skiing, and spending time with family.

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