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What to do with an inheritance (or any windfall)

Have you seen the movie Knives Out? The main protagonist, an in-home nurse with an unanswered origin, unexpectedly receives an enormous inheritance when her benefactor suddenly passes. The film ends with the deceased’s family members verbally abusing her as she stands on the balcony of her new mansion.
I love this movie because it shows how windfalls can be extremely unexpected. Therefore most of us have no idea what to do when we get one, whether it be an inheritance, stock options, a lottery win, gambling winnings, or even a big work bonus. Unfortunately, this is why many recipients of sizeable sums of money quickly squander their newfound earnings. While every situation is unique and every sum of money is different, here are a few general guidelines to stick to if you find yourself in such a situation.
Key Takeaways:

1. Don’t do anything

First of all, when you find out you’ve received a big chunk of change, don’t do a single thing. Go to bed, try to sleep, and keep this information to yourself for a few days. If it’s a substantial amount, contact an attorney and financial professional to draw up a concrete plan on how to deal with it. A large enough amount may draw the ire of friends and family members alike, so you want to take steps to secure these funds against their ill will.
Otherwise, once you’ve collected yourself, move your funds into a money market account where it can earn a bit of interest. Then, wait a few months before you make any significant decisions. Especially if it is an inheritance, you won’t be sound of mind to make a logical decision, so it’s best to sit on it until you’ve fully come to your senses.

2. Build an emergency fund

Most Americans aren’t capable of surviving for six months without a paycheck. Sudden injury, illness, or disaster renders multitudes of Americans bankrupt daily. Don’t let that be you! A sudden windfall is the perfect chance to either create an emergency fund or fill it up. Keep those funds in a highly liquid account that will at least earn a bit of interest, such as a money market account. Don’t use it to purchase any investments that may quickly lose value because tragedy may strike when markets are down, leading to a realized loss when you make your urgent withdrawals.

3. Pay off high-interest debt

High-interest debt is simply dead weight on your finances – if not worse. The biggest thing holding people back from financial freedom is the debt that holds them back and keeps them underwater. It doesn’t make sense to invest in anything else first because the chances are highly likely that the return won’t be better than a credit card’s interest rate. In fact, the average credit card rate in America in 2023 is 20.92%!
If you think you have found an investment that consistently has better returns than that, go ahead and invest if you are willing to risk it – but we don’t advise it. Unfortunately, the credit card interest rate IS guaranteed, unlike investments.

4. Time to invest

Now that you’re out of debt, you can look into investing. How you invest depends on your investment timeline, risk tolerance, and overall financial goals – that’s why we highly recommend partnering with a fiduciary financial advisor to craft a customized investment plan.
If the windfall is earned income, such as a bonus, you can potentially put those funds into your company 401(K). Otherwise, look into maxing out or opening other tax-advantaged accounts, such as a Traditional IRA or Roth IRA.
If the windfall isn’t earned, such as an inheritance, you can open up a brokerage account and invest directly in stocks, bonds, ETFs, and Mutual Funds. However, we don’t recommend individual stock-picking; your whole portfolio can go under if that company fails. Instead, invest in low-fee index funds that spread risk (and reward) over a large section of domestic and international equity securities and bonds. Remember, a fiduciary financial advisor can help you select the funds best suited to your situation.

5. Pay off your mortgage or other low-interest debt

We put this after investing because mortgages are usually low interest, at least compared to credit cards, and you’re likely to experience a higher rate of return from a brokerage account.
Investing before paying off your mortgage might build wealth a bit faster. This is entirely up to you, though. If you’d like to take some stress off your shoulders and become debt free, go for it! This step has no right or wrong answer – unless your mortgage has an abnormally high interest rate.

6. Live a little!

Okay, we’ve been stressing about being responsible with your new monies attached to your name. But as they say, everything in moderation, including moderation. Time to splurge a little bit. Of course, we don’t mean going and purchasing a brand new sports car, and we certainly don’t mean divvying out your funds to friends for a luxurious vacation.
Remember, this is your money; if you spend it all now, you won’t have it later. If you play your cards right, this money may change your life forever. Focus on protecting your principal, and then focus on enlarging it over time with risk mitigation strategies in place.

7. Pay your taxes

Chances are you won’t have to pay taxes on your inheritance if you receive a lump sum of cash. Even if you live in one of those few states with an inheritance tax – looking at you, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania – it’s the estate’s executor’s responsibility to pay it.
However, other forms of inheritances or windfalls definitely come with a tax bill. For example, any tax-deferred investment accounts, such as a Traditional IRA will be taxable when you sell off the assets. A Roth IRA may not be taxed, but there are rules regarding how quickly you must liquidate the assets.

8. Consult with a professional

Feeling unsure about how to handle sudden wealth, such as an inheritance or other financial windfall, is perfectly normal and quite common. After all, managing a significant increase in wealth can be complex and challenging, often raising more questions than answers. It involves making decisions about investment, savings, tax implications, estate planning, and charitable giving – areas where you may not have extensive knowledge or experience.
That’s precisely why financial advisors and tax professionals exist – to guide you through these intricate scenarios. These experts have spent years mastering the ins and outs of finance and tax regulations, and they remain up-to-date with any changes that could impact your situation. Their expertise can prove invaluable in making sound, strategic decisions that optimize your financial benefit and minimize potential pitfalls.

In Conclusion

With our dual expertise as fiduciary financial advisors and Certified Public Accountants, Walters Strategic Advisors is uniquely positioned to integrate your windfall into a personalized financial plan tailored to your needs. Just click the button below!

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

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  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.

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