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How To Handle A Financial Windfall

Since I have a few investment accounts with Vanguard, I receive their newsletter “What’s New at Vanguard” via email and today there was a nice article about how to handle a financial windfall.

Take a Deep Breath
If you have recently come into a financial windfall, you may be swirling with emotions – good or bad depending on the source of the windfall. As such, it is wise to take a step back and relax before rushing into any financial decisions.

It is important to take your time and weigh the various options of what you can do with the windfall. While you contemplate the appropriate course of action, you may want to look into parking the money in a relatively safe investment vehicle. You can choose to distribute the money to various savings accounts earning competitive rates or you might prefer a money market fund.

The savings accounts will offer a FDIC-insured vehicle but you will be limited to $100,000 per institution, so depending on the size of the windfall you may have to split this up into multiple accounts. If you are not extremely concerned with the FDIC-insured account, the money market fund might be a good option while you evaluate your long-term plans for the money.

Don’t Be Afraid To Ask For Help
You might not feel comfortable making financial decisions of this magnitude so be sure to ask for the help of a professional if you feel at all uncomfortable. While I feel confident in my financial decision making, I would likely seek the advice of a professional depending on the size of the windfall.

If you decide to seek the help of a professional, be careful and be sure to understand how the person is compensated. Unfortunately there are many professional advisors out there that do not care about you and your financial success but are only concerned with making a commission on the securities or investments that they sell to you. Be sure to do your homework before agreeing to work with an advisor.

Understand Tax Implications
As you think about what to do with your financial windfall, be sure to pay attention to the tax implications. It is important to not only look at the immediate tax implications but also how your long-term plan may be impacted by future taxes. There are a variety of factors that will influence the tax situation, including charitable giving, maximizing tax-deferred accounts and estate planning.

This is an area where a quality professional advisor would likely come in handy as they can help you evaluate the tax implications of your decision.

Reasonable Spending
While it is quite responsible to plan ahead and cover your practical expenses, don’t be afraid to splurge a little bit on something for yourself and loved ones. If you stay too strict with the money, you may find yourself regretting your decisions and battling the temptation to spend a more considerable amount of money.

I haven’t given too much thought to what I would splurge on because my first instinct is to funnel the money into savings. However, if I had to pick something right now I think it would be a family vacation because I have been spending far too much time working and could really use some quality time with the family away from the day to day activities.

Have you ever been the recipient of a financial windfall? Did you follow similar guidelines as presented here or did you take a different approach? If you were to splurge on something, what would it be?

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