What To Do With An Inheritance Or Major Windfall
You may feel the urge to splurge, but don’t waste this opportunity to move closer to your financial goals.
In 10 seconds
When an inheritance or major windfall leaves you with more money than usual, you may feel the urge to splurge. But don’t waste this opportunity. Use your extra money on the financial goals you’re already working toward.
In 1 minute
It’s natural to start thinking about what you could buy when you’re suddenly flush with cash. But before you spend your financial windfall on a big purchase or blow through your inheritance, stop and take a moment to reflect. Think about what else you could do with that money. What is likely to have the most significant impact years down the road?
Oh, and don’t forget: you may have some extra taxes coming your way, too. Depending on how big your windfall is and how you got it, you may need to set some of it aside to cover taxes. It’s worth talking to a CPA or tax advisor before you use this money.
After that, look at your short- and long-term goals to find the best ways to put your windfall to work. This is an opportunity to accelerate progress on your financial goals.
You might be working toward financial security, chipping away at debt, and planning for retirement. Maybe you’re saving for college—for yourself or someone else. Perhaps you want to pay off your mortgage someday. A financial windfall like an inheritance gives you a chance to make major progress toward long-term goals like these. But you’ll also want to think about your emergency fund. How much have you saved? How long will it last with your current expenses? Is it enough?
It might be time to start estate planning, too. This helps ensure that if something terrible happens to you, more of your wealth goes toward the people and purposes you want it to.
Bottom line: create a financial plan, or stick to the one you have.
In 5 minutes
In this guide, we’ll cover:
- Why it’s so easy to waste a windfall
- Why taxes should always come first
- What to do with the rest of your windfall
It’s hard to be rational when thousands of dollars appear in your bank account, or you’re staring at a massive check. You might be excitedly thinking about what to buy with a tax refund. Or mourning the loss of a loved one who left you an inheritance. Whether you were expecting this windfall or not, it’s important to slow down and think about the best way to use it.
Many people let their impulses get the better of them. But used wisely, every windfall is a chance to give your financial plan a boost.
Why it’s so easy to waste a windfall
We tend to treat windfalls like inheritances differently than we treat other money. Many of us naturally think of it like a “bonus,” so saving may not even cross our mind. And even if you’ve worked hard to develop healthy spending habits, a sudden windfall can undo your effort.
Here’s how it can happen: An inheritance makes your cash balance spike. You spend a little on early splurges, and start to slack on saving habits. This behavior snowballs, and a few months or years later, you face two consequences: you’ve completely spent the inheritance, and you’ve lost the good fiscal habits you had before.
You can also fall into the trap of overextending your finances after using an inheritance for a big purchase. Say you use the inheritance for a down payment on a bigger house. Along with a bigger house comes higher property taxes, home maintenance costs, homeowner’s insurance, and monthly utilities. New furniture, too. Your monthly expenses can expand quickly while your income stays the same.
The moment you find yourself with a lot of extra money, think about taxes.
Why taxes should always come first
You don’t want to spend money you don’t have. If you burn through your windfall without setting aside money for taxes, that’s exactly what you could be doing. You’re not going to pay taxes on a tax refund, but if you receive an inheritance, win the lottery, sell a property, or find yourself in another unique situation, you could owe some hefty taxes.
The best thing to do is consult a certified public accountant (CPA) or tax advisor to determine if you owe taxes on your windfall.
What to do with the rest of your windfall
Once taxes are taken care of, look at your windfall as an opportunity to accelerate your financial goals. Remember, if you created a financial plan, you already thought about the purchases and milestones that will be most meaningful to you. Sure, plans can change, but many of your responsibilities and long-term goals will stay the same.
Still stuck? Here are some high-impact financial goals you can make serious progress on in the event of a windfall.
Pay down your debt
Left unchecked, high-interest debt can often outpace your financial gains. Credit card debt is especially dangerous. And while your student loan debt may have low interest rates, paying it off early could save you thousands of dollars. Paying off debt doesn’t have to mean you can’t work toward other financial goals—the important thing is to consider how fast your debt will accrue interest, and make paying it off one of your top priorities. Depending on the size of your windfall, you could snap your fingers and make your debt disappear.
Boost your retirement fund
It’s not always fun to plan years into the future, but putting some of your windfall to work in your retirement fund could make life a lot easier down the road. Put enough into retirement savings, and you may even be able to adjust your retirement plan. Maybe you could think about retiring earlier, or giving yourself more money to spend each year of retirement.
Here’s more on planning your retirement.
Refinance your mortgage
Paying off your primary mortgage isn’t usually a top priority . . . but refinancing can be a smart move. If you’re paying mortgage insurance and your equity has gone up enough, refinancing might mean you can stop. And locking in a lower interest rate can save tens of thousands of dollars over the life of your mortgage. Taking this step means your goal of home ownership may interfere less with your other financial goals.
Revisit your safety net
Any time your cost of living or responsibilities change, your emergency fund needs to keep up. Whatever stage of life you’re in, you want to be confident you have the finances to stay afloat in a crisis. If you suddenly lost your job or couldn’t work, do you have enough set aside to maintain your current lifestyle for at least a few months?
Start estate planning
Wherever you’re at in life, it’s important to consider what would happen if you suddenly died or became incapacitated. What would happen to you, your loved ones, and your assets? Would your finances make it into the right hands? Would they be used in the right ways? When you find yourself with a major windfall, it’s a good time to create or reevaluate your estate plan.
Take time to double-check that you’ve set beneficiaries for all of your investment accounts. If you haven’t already, create a will and appoint a power of attorney. If you have children, you may want to set up a trust. Estate planning isn’t fun, but it can start paying immediate dividends in the form of peace of mind.
Give your financial goals a boost
It’s normal to want to spend your inheritance. It feels like extra cash, just waiting to be spent on a big purchase. But if you resist the temptation, your financial windfall could be an incredible opportunity to reach new milestones and achieve goals that matter to you. Not sure where to start? Tell us about your financial goals.
Please note that Betterment is not a licensed tax advisor or estate planning professional.