Receiving a sudden financial windfall can come with many mixed emotions. It’s exciting and overwhelming all at the same time! When handled with care and used wisely, receiving a large sum of money provides a great opportunity to improve your financial situation.

Windfall money might materialize in the form of gifts, bonuses, settlements, inheritances, lottery winnings, property sales, etc. No matter the source of funds, getting any kind of financial windfall can immediately send your mind reeling with possibilities.

So, what would you do if you received a large lump sum of money? Would you save it, invest it, or treat yourself to a handful of nice things?

In this article, we’ll be looking at ten windfall finance tips to help you make the most of that extra cash. And use it to benefit your future!

What is a financial windfall?

Well, a windfall is usually like a surprise gift from the financial universe—it’s a sudden and unexpected influx of money. 

This money might not always be a complete shock. However, it is generally a fairly large sum of money that doesn’t come to you in a traditional way.

The best way to understand is to look at some examples.

Examples of financial windfalls

Here are a few of the diverse ways windfall money might come into the picture:

• Generous gifts from people in your life.
• Inheritances from family members who pass on.
• Extra bonuses at work that weren’t already factored into your total compensation.
• Winning the lottery/contests/sweepstakes (we all wish, right?)
• Settlements from legal proceedings.
• Tax refunds that are more than you expected.
• Successful investments that gained value suddenly/rapidly.
• Profits from selling something valuable, like an heirloom or piece of land. 
• Finding money you didn’t realize you had—make a habit of checking unclaimed property websites for states you’ve lived or worked in!

Even winning a small amount in a contest could be considered a financial windfall. 

However they enter your life, these unexpected surges of money can be both thrilling and a little stressful. The key to success is to approach them with a clear plan.

10 steps to manage a financial windfall

A situation like this might feel like a stroke of luck—and it is! But many people follow the impulse to use their money for short-term enjoyment, then end up with nothing to show for it later. You don’t want to be in the same boat! 

Handling a windfall wisely is crucial to ensure lasting benefits for your financial future. These 10 steps can help you handle your windfall finance planning with a future-focused mindset.

1. Don’t make any sudden decisions

Before doing anything with your financial windfall, pause! Take some time to think.

Put the money into different types of bank accounts like savings or a money market account, and refrain from touching it during this waiting period. You are more likely to make better decisions about the money if you don’t immediately start spending.

When you receive a good amount of money, there’s often a tendency to purchase or do things that you wouldn’t normally be able to do.

However, in many situations, rushing causes rash decisions. It is wise to take several weeks, or even a few months, to think about your options before making plans for the money. Waiting will help you be more rational and more intentional.

2. Consult with professionals for your windfall finance planning

During the waiting period, consult with a certified financial planner, a financial advisor, and/or a CPA to determine what to do concerning taxes. A large amount of money usually comes with tax implications and/or fees that need to be figured out before you make too many plans for the windfall.

After working through the tax portion, seek advice from your financial advisor or planner to come up with a good plan of action for the rest of the money.

Using your financial goals as a guide, work with a professional to establish (or update) your financial plan. They will be able to provide advice about the best ways to use the financial windfall to achieve your goals. That might include assessing your risk tolerance, helping you build an investment strategy, or figuring out how to save money for short-term objectives.

They can also help you determine which accounts are best to hold any savings that you don’t want to put into investments. 

3. Update or create your estate plan

If you don’t already have an estate plan, now would be a great time to create one. After receiving a significant amount of cash, your net worth and financial circumstances change. It’s a major life event.

You should update or create an estate plan to reflect the change. Consult with an estate attorney to make decisions about how your loved ones will be taken care of. Also, determine how your money and other assets will be distributed in the case of an unfortunate event.

4. Save some windfall money for emergencies

Set aside some of the money to start or build up your emergency fund. It’s a good idea to have at least 3 to 6 months of living expenses saved. Depending on the amount, receiving a financial windfall can help you fully fund your emergency fund.

Be proactive and save for those “just in case” moments when you may need access to cash quickly. You never know when you may need to tap into your short-term emergency savings, if you need to live without a job for a while, for a medical expense, or for another emergency.

5. Pay down or pay off high-interest debt

Paying off high-interest debt, such as paying off credit card debt, will save you a lot of money over time. Interest rates and fees can be very high on consumer debt. Throwing a big lump sum of money at those debts can be a game-changer! 

If the amount isn’t large enough to pay off all of your debt, paying down your balances is still progress. Not only will you save money fast by paying less interest, but you will also reduce the amount of time it takes to repay your creditors.

Paying off or paying down debt helps your regular monthly cash flow as well. It frees up income that you would normally allocate to debt repayment and allows you to use that cash elsewhere or invest it.

So, if you decide to use part of your money towards your debt, be sure to craft a debt reduction strategy for it!

6. Save for a large expense or upcoming goal

If you have a large expense coming up soon, you can use part of your financial windfall to jumpstart your savings for that expense. Or maybe there’s something that you want to purchase in the future that has a hefty price tag.

Acquiring a big amount of money can provide cash to set aside for that as well. Perhaps you are someone who desires homeownership. This would be a great opportunity to get your down payment and closing fees squared away.

Or, if you already own a home, you could put the money towards your mortgage. For those with high-interest rates on their mortgage, it can be smart to pay your loan balance down faster.

7. Invest your money

Take advantage of increases in value and compounding interest by investing to have money stashed away for the future. Get help from your certified financial planner with creating an investment strategy and setting up your investment accounts, such as index funds. 

Whether you want to invest for retirement, income, or growth, they can assist you in creating an investing plan that fits your goals and needs. Dollar-cost averaging is one simple way to make sure you’re diversifying your purchases across the highs and lows of the market.

Of course, investing doesn’t have to mean the stock market alone. You can also invest in a way that provides passive income to you now through an avenue like passive real estate investing or other income-producing assets. 

No matter your goals, please consult with a pro to determine the best way to approach investing for your particular situation. (Check out our article on what to do with 50k for ideas!)

8. Use your money to invest in yourself

Your cash can also be used as an opportunity to invest in yourself. You may want to invest in your education. Using your money could give you a chance to further your studies or make a career transition. 

Or maybe you have a unique side hustle that you’ve been working on. A large amount of money may be what you need to take it to the next level. 

If you have a viable idea for a business but haven’t had the capital to make it happen, maybe consider using a portion of the windfall to invest in yourself and your endeavors.

9. Do something nice for yourself

Many of the points that we have touched on so far aren’t inherently fun or exciting. There are a lot of “business” types of decisions that you’ll have to make, but don’t forget to treat yourself a little bit.

Set aside a small portion of the money to do something nice for yourself. Purchase something that you’ve had your eye on.

Take a nice family vacation. Take the opportunity to do something fun and exciting that you have been waiting to do or that you otherwise wouldn’t have had the chance to do. While a windfall is a great opportunity to make some financial strides, it also provides the chance to live a little.

10. Donate to a cause you’re passionate about

Help out others and donate to those who are less fortunate. Not only will you be doing a good deed for your community, but this may also lower your tax liability. Be sure to discuss this with your financial planner or financial advisor for specific guidance.

Pick a foundation or organization that you believe in and are passionate about, and bless them with a donation. They will be grateful for your contribution. And you will feel good about using your blessing to help those who are less fortunate.

Expert tip: Keep living your life normally

This little psychological tip can make it easier to handle a sudden influx of money: act like you don’t even have it! An attitude like this will help you avoid lifestyle inflation, aka “lifestyle creep.” 

Continue budgeting and spending just like you did before the financial windfall. Resist the temptation to immediately upgrade your living standards with the newfound funds. 

With this approach, you’ll be able to stay grounded and not get swept up in various short-term impulses and desires. Make your windfall finance plan, stick to it, and then put it out of your head.

Factoring in taxes

Before any visions of spending dance in your head, it’s crucial to consider the tax implications. 

Different types of windfalls may have different tax treatments. Inheritances, for instance, are generally tax-free, but windfall money from a lottery win or a bonus is typically taxable. 

Discussing with a tax professional can help you understand your obligations and plan accordingly. The last thing you want is to earmark all the money for other purposes, then get hit with a huge tax bill and scramble at the end of the year!

How do you deal with sudden financial windfall?

Handling a sudden financial windfall requires a thoughtful and strategic approach. Start by resisting the urge to make impulsive decisions. Give yourself a cool-down period to process your feelings before you take action.

While you wait, take the time to assess your financial goals and find examples of financial goals, whether it’s paying off debt, saving for the future, or investing. Make a list of priorities balanced between your wants, needs, and goals.

Another idea is consulting with a financial advisor to create a comprehensive plan tailored to your individual circumstances.

What should you do with a $1,000 windfall?

A $1,000 windfall is a great opportunity to establish or boost your emergency fund. Having a solid financial cushion can provide a sense of security and prevent you from going into debt in case of unexpected expenses. 

Alternatively, consider using it to pay off high-interest debt to save on interest payments and improve your overall financial health.

If you want to treat yourself a little, take $50 to $100 for lunch or dinner at a restaurant you like!

What should you do with a $5,000 windfall?

If you find yourself with a $5,000 financial windfall, you have more room to make impactful financial moves. 

Consider splitting the amount between debt repayment, savings, and investing. Tackling high-interest debt first can free up future income, while allocating a portion to an investment account can help your money grow over time.

If you want to take 5 to 10% of this amount for the “treat yourself” fund, that gives you $250 to $500 to play with. The windfall money could turn into a fun weekend away or a purchase of a bigger item that’s been on your wishlist.

What should you do with a $10,000 or more windfall?

A windfall of $10,000 or more opens up significant opportunities. Consider diversifying your investments and exploring a mix of stocks, bonds, and real estate. Paying off (or paying down) any substantial debts, such as student loans or a home mortgage, can also be a wise move. 

If your windfall is on the larger side, you could earmark a portion of it for a dream vacation, a newer car, or other pricier short-term goals. But be careful!

Decide how much you want to spend for personal enjoyment, prioritize your wants, and stay disciplined so you don’t exceed that amount. Otherwise, your money can have a way of disappearing quickly.

It may also be a chance to invest in your future dreams. Look into further education or business opportunities so you can turn that money into long-term financial stability.

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Manage your large sum of money smartly!

Depending on the size of the windfall, doing a combination of the things listed above may be the best way to make the most of the situation.

However, no matter what, please remember to pause and take some time for your excitement and other feelings to level out.

It is exciting to acquire a financial windfall. It is exciting to think about all of the things that you will be able to do with that lump sum of money and how it will help you improve your financial situation. But without careful thought and consideration, it is also very easy to misuse the money and later regret it as a bad financial decision.

So if you receive a windfall, consult with financial professionals, be intentional, make progress towards your goals, and don’t forget to have a little bit of fun along the way!

Learn how to grow your money even more with our completely free “How investing works” bundle! For more great money tips, tune in to the Clever Girls Know podcast and YouTube channel!