“I don’t know what they want from me. It’s like the more money
we come across, the more problems we see.”
“Mo’ Money Mo’ Problems”, by Christopher Wallace (aka The Notorious B.I.G.)
A “windfall”, according to the Oxford English dictionary, is “a piece of unexpected good fortune, typically one that involves receiving a large amount of money.” In England in the 15th and 16th centuries, landowners were forbidden from cutting and selling timber, even from their own private land, because all wood was reserved for the Royal Navy to use in ship-building. But if the wind blew a tree down, the landowner was free to sell it to whomever he wished, and “windfall profits” were realized.
Today, windfalls come in many forms: a successful bet on a stock, a bonus at work, winning a lottery and, most common, an inheritance or gift from a relative. Regardless of the source, a windfall can be a tremendous financial blessing when handled with composure and a long-term view. Handled improperly, however, a windfall can be surprisingly easy to squander.
YOUR TWO SELVES
On the surface, the solution to this problem is simple: save the windfall money for the future. But simple is not the same as easy; financial complexity and a lack of discipline can induce a suddenly wealthy person to make poor financial decisions, and many often do.
Why do so many people find saving difficult? The best way to think about this is that there is often a disconnect between your current self and your future self. Your current self is tempted by the rush and excitement of expensive impulse purchases, and that excitement might cause your current self to completely ignore any consideration of your future self. Expensive impulse purchases, however, will typically reduce the wealth your future self will be able to enjoy, and because your future financial needs are highly uncertain, you should do your future self a favor by saving most of your windfall.
You should also carefully consider how to allocate the money you do decide to save. First, if you have not done so already, use your windfall to establish a rainy-day fund in a risk-free savings or money market account so you can have quick access to cash in the event of a personal financial emergency. We typically recommend that this fund cover at least three months of expenses.
Next, reduce or completely eliminate any high-interest rate debts, such as those from credit cards and some types of student loans. Be sure to target variable rate debts too. If you are fortunate enough to have a fixed rate mortgage from the era of low rates prior to 2022, definitely keep it, but pay down all your other debts aggressively.
Once you have reduced or eliminated these debts, treat yourself to something nice with a small portion of the remaining money. Better yet, buy something for a friend or family member, or make a charitable donation. This will take some of the sting out of our next recommendation, which is to use the remainder of your windfall to initiate or enhance a long-term investment plan to benefit your future self.
MO’ MONEY, MO’ PROBLEMS
A windfall can improve your finances, but as Notorious B.I.G. mentioned, it also can be a burden on many aspects of your life. Taxes are perhaps the most obvious burden of a windfall. On the one hand, a gift or inheritance usually is not taxable at the federal level unless the benefactor’s lifetime bequests exceed the exemption amount (more than $13 million in 2024, which may be cut in half for the 2026 tax year). On the other hand, lottery winnings, a large bonus, a significant raise in salary, and the sale of a winning stock are usually taxable, so be sure to consult a tax professional regarding exactly how much of a bite the government will be taking from your windfall.
Another burden to consider is that as your wealth increases, so does your profile as a target for fraud. The perpetrators of financial crimes are becoming ever more sophisticated, so you should always use unique passwords and dual-factor authentication when accessing your money on financial apps and websites, and remember that when someone gives you an investment pitch that sounds too good to be true, it probably is.
The least obvious burden of a windfall is that more money does not necessarily lead to more happiness. Some research indicates that wealth can give a slight boost to happiness up to a point, but most people, even winners of lottery jackpots, tend to have a baseline level of happiness they revert to shortly after their windfall event.
ENJOY THE NOW, BUT NOT TOO MUCH
A few years ago, one of our clients sold his business and planned to use a portion of his proceeds to buy a new Porsche. A family member, concerned about the high price of the car, asked our client whether he had thought through the purchase. His reply? “Yes. Every day since I was in the eighth grade.” As this inspiring story reminds us, we should not take all the fun out of a windfall. He did buy the Porsche, and there was enough money left over to take care of his future self.
Properly managing a windfall requires calm deliberation, moderation, and a long-term outlook. Should the wind blow in your favor one day, enjoy the moment, but be sure to take care of your future self as well.