Windfalls Happen

By Sherrill St. Germain
April 2007, Revised December 2017

You've just discovered that Aunt Edna left you $400,000. You've never had that much money before, and you have no idea what to do with it. Furthermore, you know she worked really hard for it all her life, so you don't want to blow it. Do you pay off all your debts, or invest it? You'd love a vacation home. Would that be a good investment? The check has been sitting on your desk for the past month gathering dust. What should you do?

Absolutely nothing! Well, at least for a while anyway (right after you deposit that check in a nice, boring savings or money market account).... And here's why.

Free money is a funny thing. Those not born wealthy often think "If only I had money, I'd be worry-free." And then it happens. Whether it's a $6,500 income tax refund, a $80,000 insurance settlement, a $400,000 inheritance, or a $2.8 million lottery prize, an unexpected windfall of any size is usually seen as cause to celebrate. But then something truly unexpected starts to happen. Your old money worries ("There's never enough!") are replaced with new money worries, probably including some of these: 

  • Fear of losing or wasting it all, especially if your prior money management track record has been less than stellar
  • Guilt over not having earned the money or feeling you don't deserve it
  • Pressure to make the absolute most of this tremendous opportunity
  • Concern that friends and family may see you differently now that you're rich
  • Apprehension that you may, in fact, need to become a different person to accommodate to your increased net worth
  • If an inheritance, grief over the loss mixed with anxiety about how to honor your benefactor's legacy
  • Worry about whose advice to listen to
  • Surprise and disappointment that money doesn't make your worries go away

The degree of stress experienced seems to be in direct proportion to the size of the windfall vs. the amount of money you're accustomed to dealing with. To Oprah or Warren Buffett, that $2.8M lottery prize would be a drop in the bucket. To others, the $6,500 tax refund could be just the shot in the arm needed to get out from under from a lifetime of living paycheck-to-paycheck. 

Somehow, for many of us, free money isn't so much about numbers as it is about the emotions and the bigger picture implications of being in possession of more money, and more choices, than you imagined possible. How you handle the numbers AND the emotions can mean the difference between ending up set for life, right back where you started, and thinking money is the root of all evil.

I mention all this because knowing in advance might help you succeed at Job #1: Don't freak out. Yes, it is a lot of money, and you could look at it as a big responsibility for which you are ill-equipped, a big opportunity that absolutely must be maximized, a big burden that has been foisted upon you.... or all of the above. Or, as suggested above, you could simply plunk it in a nice, boring savings or money market account or two for a while (1). Sure, if the windfall is large & you're carrying high-interest-rate debts that are small in comparison, go ahead and pay them off. And do feel free to treat yourself to a little something. But be sure to set aside the bulk of it until you reach the point where you realize that, heck, you're exactly the same person you were in March before the windfall and you are under no obligation to do anything at all with it. The money only has as much power and meaning as you give it. Once you are able to think of it as a tool which might help you (and/or others) live a better, more financially secure life, you're on the right track. 

Now you are ready to move on to Job #2: Deciding what, if anything, more interesting you want to do with it. But. Please. Take. It. Slow. Don't worry about missing out on investing it in a "sure thing", and don't make a snap decision to buy Big Ticket Item X because it's going to be 50% off for a limited time only. Those kinds of opportunities will always be there, and you can rest assured that if you act in haste, you will repent at leisure (with apologies to the author of the original quote.) 

Why the emphasis on putting on the brakes? Keep in mind that people who've built wealth gradually have had time to get used to the idea and to build up the habits that allow them to maintain it. As a windfall recipient, you're getting a crash course, and the most beneficial thing you can do is to pace yourself.

At this point, the best course of action depends very much on your pre-windfall financial situation and is different for everyone. Whether you were previously in debt, doing OK, or very well off financially will very much drive what to do with the money. 

In your case, since you've  never had this much money before, you mention having debts, and the amount is $400,000, I would imagine that your priorities will include establishing an emergency fund, paying off some (although perhaps not all) of the debt, and beefing up your savings for retirement and other goals. Wild guess: a vacation home, often more of an expense than an investment, is probably not the best idea at this time. But to come up with a really solid set of recommendations about how to make the most of Aunt Edna's legacy, I'd need to know the details of your current situation, as well as your short and long term personal financial goals. Which brings me to my next suggestion... It's time for you to start working with a financial planner. 

Since you're asking this question, you must already know that you need help making tradeoffs between your many choices of what to do with the initial sum. Be aware too that a financial planner can alert you to tax laws you may now be subject to and show you how to take advantage of strategies and tools for preserving and growing wealth -- things you probably have never run across before. In your case, it is particularly important that you work with someone who is willing to not only tell you what to do, but also to get you up to speed on the topics you need to understand to manage this money responsibly over the long haul. Over time, with the right attitude and some expert guidance, I bet you'll find that Aunt Edna's bequest turns out to be worth a lot more than you ever imagined, in ways that have nothing to do with numbers.

(1) Make sure the account(s) match your requirements for being FDIC-insured.