Like most people who play the lottery -- even occasionally -- you probably find yourself dreaming about what you'd do if you won a big jackpot. And, certainly, it's fun to think about buying new cars and houses and going on once-in-a-lifetime vacations.
But, turning those idle dreams into a windfall plan is actually a sound financial move. Why? Because you may not win the Powerball, but you may find yourself on the receiving end of a windfall of another sort -- an inheritance, a settlement, life insurance proceeds, or even the sale of a business or other asset -- and facing the sudden need to decide what to do with all that cash in a hurry.
So, what should your windfall plan include? Here are 4 key aspects.
Deal With Taxes
One of the first tasks with any sudden influx of money is to determine how it will affect your taxes... or not affect them. A gift, for example, may not be a taxable income event while a court settlement may or may not be subject to taxes. A large windfall in one year could bump up your overall tax rate and result in a larger bill than you expect. A little research now can help you understand the tax effect of common windfalls like gambling winnings or life insurance payouts.
Deciding what to do with the amount you have left after income taxes are paid is the fun part for most people. But, a windfall plan should be less about dreaming big and more about understanding what you want to accomplish with your newfound money. Make a written list of your priorities, such as funding retirement, paying off a house, paying for kids' college, making donations, or helping loved ones. Place tentative dollar amounts or percentages next to each goal so you can see how each impacts the next.
Inventory Assets and Debts
While creating your priorities list, take inventory of where you stand financially at the moment. This means collecting information on all your debts, including what's due and what the interest rates are. Then, list your assets as well. This likely includes retirement accounts, bank accounts, and the value of hard assets like your home. Knowing what you need to pay off and what you already have can help you decide how best to deploy any extra cash.
One of the best things you can have on your side if you get an influx of money is a team to help you decide what to do with it. This team should consist of an accountant, a lawyer, and a financial planner. Creating a relationship with each one now gives you time to find the right person to work with. And it has benefits even now, as you could take positive steps toward improving any financial weak spots you currently have.
By thinking about -- and acting on -- these few tips before any money falls from the sky, you'll be in a much better position to make the best choices... whether or not you ever have your own magical windfall.