The following article was written by one of our contributors. You can know more about him at the end of this post.
Before you read our contributor’s article, let me give you the definition of the word “windfall” first.
What is a windfall?
Windfall is a sudden and unexpected piece of good fortune or personal gain, a good example of a windfall is when you win the lottery or when you receive an unforeseen inheritance.
Just look at how happy the man below is with all his cash. I’m sure you’ll feel the same when you experience a windfall too.
Now, have you ever received a large sum of money that you didn’t expect?
What most of us don’t know is that when people come into a windfall of money, it tends to cause more problems than solutions to their finances. Most people don’t have any idea on what to do with the money or how to manage it properly. This doesn’t mean that windfalls are bad things, but they do require a little more time and attention than regular income.
Most people that receive windfalls tend to spend it. They justify the spending because it was money they weren’t expecting. While each person can do what he or she wants with their money, many will spend it.
It is common for people with windfalls to get into debt. Why do they do this?
They think they have more than they really do. They use the cash as justification to incur debt.
Let’s say that you get a $10,000 windfall. You take that amount and go buy a $20,000 car. You justify the purchase by saying that you are only going into $10,000 worth of debt instead of $20,000. You are now getting a nicer car and only incurring half the debt.
This tends to be the type of rationale for most. Instead of just buying a $10,000 car and not incurring any debt, they push for more.
Windfalls don’t have to put anyone in debt and there are ways to make sure that you handle it properly. The key parts are understanding how much is going to be received and to create a plan around it.
3 Steps You Should Do When You Experience A Windfall
Stop and Think
Okay, you just got a nice windfall that you didn’t expect. Awesome! The first thing that many people want to do is go out and start spending. They want to celebrate their money and buy some cool stuff. Since it is not money that was expected, spending it is an easy choice. That doesn’t make it the right one.
The first thing you need to do is stop and think. Don’t do anything with the money. You need to think about how much you are getting and what you really need to do with it.
Do you need to spend the money immediately?
If you stop and think about your new windfall, then you can start creating a plan.
Identify Your Needs
We all know wants versus needs. The general problem these days is that many people think they need everything. You really only need food, clothing, and shelter. Those are necessities. Everything else is really a want.
That being said, it is extremely important to identify what your needs are and how your windfall can help achieve those needs.
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Have you heard of how many lottery winners go broke after winning it big?
The reason why this happens is because they just go on a spending spree. They don’t know how to handle the amount of money they have, so they just spend. They think they have so much money, but when you are buying big homes, new cars, and giving money to friends and relatives, the cash can go quickly.
Before you do anything with your money, you should seek help. There are many services that are there to provide financial assistance and advice. There are professional money managers that can help you decide what would be best with your windfall.
If you already have a financial adviser, then set up a meeting. If you don’t, think about getting one to help you with your windfall. They can help you come up with a plan, and show you how long the money will last depending on what you want to do with it. People that get professional financial advice are more likely to use their windfall to better their financial situation than those who take matters in their own hands.
Windfalls can be an unexpected pleasure, but they can also lead to poor financial decisions. This can actually put you in a worse financial situation than you were in before you received the windfall. In order to make the most of it, one should stop and think, create a plan, and seek advice.
Don writes for Money Smart Guides, a personal finance blog that helps people get out of debt and learn to start investing for their future.
He wrote a book, 7 Investing Steps That Will Make You Wealthy, which simplifies investing and provides 7 actionable steps to help you get the most of out of investing.