Handling Financial Windfalls

The Financial Planning Association (FPA) and Association for Financial Counseling and Planning Education (AFCPE) recently held a webinar called What to Do When Your Ship Comes In. Below are five key take-aways:

¨      Windfalls can be defined as any unexpected receipt of money that is larger than what someone is accustomed to dealing with. By this definition, windfalls are fairly common. Windfalls of varying dollar amounts can be viewed differently depending on a recipient’s income and assets.

 

¨      There are many sources of windfalls including tax refunds, insurance and legal settlements, divorce settlements, inheritances, the lottery, stock options, proceeds from the sale of property, and more.

 

¨      Windfalls can provide a sustainable source of long-term wealth if handled properly. Unfortunately, many people lack financial knowledge and experience to handle them properly.

 

¨      Many people who receive windfalls experience a range of emotions including euphoria (which can lead to overspending), depression (feelings of unworthiness or guilt), anger (e.g., rage from being injured in an accident), grief (e.g., mourning the death of a loved one), and distrust (e.g., wondering if people want you for your money). These emotions can lead to poor money decisions.

 

¨      Windfall recipients need time to accept their “new reality.” They also need to develop long-term plans for the use of their windfall that are consistent with their values. It is okay to “park” money in a cash asset (e.g., money market fund) until long-term plans are fully fleshed out.