The Jackpot Problem: A Wise Guide to Windfalls

Alden Wicker

Coming into a big sum of money might seem like the perfect problem to have. But at the risk of throwing cold water at you, it’s also a big responsibility. It’s also perfectly O.K. to be nervous or maybe even scared that you’ll do exactly the wrong thing with your big bonus, inheritance or tax refund.

But take a deep breath. It’s actually not that complicated.

We talked to two Certified Financial Planners™ to find out just how they advise clients who are suddenly in the money—and then we distilled their insight into a short and sweet step-by-step windfall guide.

1. Get Grounded

“My first recommendation would be not to actually look at it as a life-changing event—regardless of the magnitude of the windfall,” says David Blaylock, a Certified Financial Planner™ with LearnVest Planning Services. “Lottery winners receive millions of dollars, and they can still go through a bankruptcy. And you hear about sports stars who blow through their money all of the time. So approach a windfall as something that can remove pressure from your current situation instead.”

Wendy Weaver, a Certified Financial Planner™ at FBB Capital Partners, agrees. “Getting an inheritance or any kind of a windfall doesn’t change you,” she says. “If you didn’t manage your money carefully in the past, just because you come into a windfall doesn’t mean that you’ll be good at managing money going forward.”

In short: Your windfall won’t solve all of your problems automatically—no matter how big it is. But if you have the right attitude, it can certainly help solve a few! “Look at the windfall as a part-time job or business that you’re running and need to handle responsibly,” Weaver says.

Now, on to your new part-time job responsibilities.

RELATED: Why Lotto Winners Won’t Give Up Work

2. Put It in a Safe Place

“Above all else, you should never leave that money in your checking account,” says Blaylock. “Because eventually it will probably get spent, and you may not have made any progress on your financial goals. I see that very, very often.” Indeed, it can be hard to say no to a second cocktail—or even a trip to Vegas—if every time that you take out cash you see a hefty balance at your fingertips.

While Weaver admits that you typically won’t make a big return on a savings account, with interest rates being so low, “it may be worthwhile to sacrifice a little bit of return to take the time to make thoughtful decisions about the windfall,” she says, “rather than put it at any sort of risk.”

  • Je’Nai Talley

    This is so right on time, I have been wondering about this a lot lately! Very helpful information.

  • MyInheritance

    When I received an inheritance in 1996, I decided to invest the whole $126,000 for retirement; I opened a brokerage account and bought a portfolio of domestic and international stock mutual funds. This worked out pretty well for me, except for one pitfall.

    The brokerage account had a margin loan feature that allowed me to borrow against my portfolio. A margin loan against retirement savings in a brokerage account differs in several ways from a 401K loan. First of all, it is more convenient: the brokerage firm gives you a checkbook and you can make borrowing transactions simply by writing checks. Secondly, you are not liquidating investments as you would in a 401K loan: your money remains invested and the brokerage firm advances you the cash for the loan. And finally, the loan does not have to be paid back on any particular schedule: you can carry a margin debt indefinitely until it exceeds a certain percentage of your portfolio balance, at which point you receive a margin call and you have to either deposit more cash or sell some stock to bring the percentage back in line.

    During the bull market of the late 1990s, I found it very easy to take margin loans for recreational expenses. Every month when I got my statement, I saw that my investment returns had outpaced my spending and my balance was growing at a good clip despite my margin debt. I’d log into Fidelity’s retirement calculator, plug in my 401K balance and my brokerage balance net the margin debt, and see that I was still on track for retirement despite my borrowing. So I had no motive to repay the margin loan or stop writing new checks against the account–until the stock market crash of 2008.

    By time I retired in 2013, my margin debt had grown to $90,000. After I paid this off, I still had $495,000 in savings, which allows me to maintain my standard of living. But I could have substantially upgraded my standard of living if I hadn’t lost that $90,000 to margin debt.