For most of your life, money comes in at a slow and somewhat steady pace. Maybe you get a paycheck every two weeks or a Social Security payment once a month. Now and then you might get a bump from a raise, bonus, gift or side hustle. Sometimes, though, you have a genuine windfall, the type with three or more zeros at the end of it: an inheritance, an insurance settlement, a lump-sum pension payout or the proceeds from the sale of a long-held family home. Even a tax refund can seem like found money at times.
At these moments, you’re faced with the challenge of handling the sudden appearance of a large sum of money that could change your life — or be a lost opportunity. Follow this plan to make the most of the moment.
Slam on the brakes
“The first thing to do is take a deep breath,” says New Orleans financial planner H. Jude Boudreaux. “We often rush to make a decision, and quick choices can lead to regret.” You need to give yourself time to process your emotions and plan carefully, especially when a windfall is the result of an unhappy event like the death of a family member or a settlement from a traumatic accident.
While you’re figuring out your next steps, you may want to park the money in a safe place that’s separate from the rest of your savings, making it less tempting to fritter away. Up to $250,000 of a single depositor’s accounts in the same category at a bank or credit union is insured. Alternatively, U.S. Treasury bills are extremely low risk.
Ride out the emotional roller coaster
With an inheritance, you might feel that you don’t deserve the bequest or wish that the deceased person had enjoyed the money while alive; the resulting mixture of guilt and grief might cause you to burn through the money quickly or impulsively give it all away. Even if the source of the money isn’t tragic — perhaps it’s a home sale — your first reaction can be giddily irrational. We have a natural tendency to treat found money differently than income from a paycheck, leading to mindless splurges.
Megan McCoy, a marriage and family therapist who teaches financial therapy at Kansas State University, suggests talking to a friend or therapist to help articulate your emotions and how they might be affecting your financial plans. “Try to have a split in your brain,” she says. “Keep the financially smart things to do and the emotional processing distinct.”