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Ask Stacy: What should I do with a windfall?

Whether a tax refund or an inheritance, sooner or later most of us will have a lump sum of money land in our laps. Here's the step-by-step on handling it properly.

By MSN Money Partner Jul 8, 2014 12:49PM

This post comes from Stacy Johnson at partner site Money Talks News

Money Talks News on MSN MoneyMost of us, at one time or another, will get some unexpected money. Being confused as to what to do with it is a nice problem to have, of course, but a problem nonetheless.

Here's this week’s reader question:

What is the best way to deal with a large inheritance? Something that is well into the $400,000 to $850,000 range? Age is only in middle 50s. -- Tina
Now, here's what to do, step by step.

1. Say nothing, do nothing

Don’t do anything at first: No shopping sprees, no donations to charity, no lending money to friends and family. Don't even tell anyone. The last thing you want to do is risk wasting your windfall by acting on impulse, or encouraging friends or distant relatives to hold their hands out.

The greater the sum, the longer you should take to assess your financial situation and identify some short- and long-term goals. If the amount is significant, a month isn't too long to wait. The money's not going anywhere.

2. Define your goals

Most of us have a vague idea of what we want from life. Now's a great time to turn those vague thoughts into an action plan by establishing specific goals.

One way to approach goal-setting is to imagine yourself on your deathbed. As your life passes before you, what would you be thinking about? Unless you're as shallow as a puddle, you probably would be thinking a lot more about the times you had than the things you had. You'd likely be remembering the people you touched and who touched you.

When you're able to wrap your mind around the things in life that truly make you happy, all that's left is to use your resources -- both time and money -- to bring more of those things into your life.

For example, if helping your family brings you fulfillment, make it a goal that within X years, you'll have saved X amount to help with things like college. If charitable work does it for you, make it a goal to donate X dollars by X date. If seeing the world is your dream, decide when you're leaving and exactly how much it will take. If you love laughing with your spouse, make it goal to retire in X years with X dollars so you can spend more time with that person.

Money © Comstock/CorbisOnce you know what you want, you're better prepared to point your time and money in that direction and avoid getting sidetracked by other things.

There's no limit to the goals you might have, and there's no shame in putting things like a nice house, car or vacation on your list. But no matter where you want to end up, the shortest route is to decide in advance where you're going. 

3. Remove the roadblocks

Once you've established some financial goals, start removing the impediments to reaching them. One of the worst is debt.

If you have debt, especially the high-interest kind, pay it off. If you're paying 20 percent interest on a credit card, paying it off is like earning 20 percent, tax-free and risk-free. That's better than any investment. So paying off debts, especially the high-interest kind, will make you richer and thus put you in a position to reach your goals faster.

There are instances where paying down debt makes less sense. For example, if you're paying 3 percent on a mortgage and can earn 8 percent in the stock market, you'll obviously come out ahead by leaving your debt intact. But in general, debt is a monster that devours your available resources and puts you farther from the finish line. Destroy it with a windfall, or any other way you can.

4. Grow the rest

If you're fortunate enough to inherit $850,000, the best thing you can do with it is make it into $1.7 million. How? By investing it. If you’re not sure what to do, now’s the time for a little research. Check out articles like "Beginning Stock Investor? Here's All You Need to Know" for tips like:

  • Don't be a dope. Day trading, penny stocks and buying based on rumors are sucker bets.
  • Don't put all your eggs in one basket. Diversify: stocks, real estate -- maybe even turning a hobby into a business. Spread it around.
  • Kiss the money goodbye for a while. One of the luxuries of a windfall is it allows you to invest longer term without worry. Things like stocks and real estate take time to blossom. A windfall buys you that time.

That is, provided you:

5. Expect the unexpected

The only thing that's certain in life is that nothing is certain. Always keep some powder dry. If you put all of your money into things that fluctuate in value, like stocks or real estate, and then need the money, you could be forced to sell at the worst possible time.

Your emergency savings will be kept in a bank or money market fund that will pay nearly nothing. Discouraging, but better than being forced to fire-sale illiquid investments. Don't think of these savings as a wasted opportunity. Think of them as what they are: an insurance policy.

Always have at least six months' living expenses in your emergency fund. A year's worth would be better.

6. Seek expert advice

It's best to hire an expert if your windfall is of considerable size. Interview several financial advisers who are paid by the hour, never by commission. And don't ever deal with anyone without checking their credentials.

Ask friends for referrals, check the National Association of Personal Financial Advisors, preferably both.

And don't ever simply turn money over to someone else. Helping you understand your investments is their job. Being responsible for your own money is yours.

7. Enjoy yourself

Last, but definitely not least, use some of that money to treat yourself to a great experience, like a trip to a place you've always wanted to see. One of the main reasons to have money is to enjoy it.

Obviously, the weight you'll put on the steps above will depend largely on the amount of your windfall. Inheriting $400,000 is different from getting a $2,000 bonus at work. But the principle is the same: Take your time, think it through and decide how best to use the money to get the things you want from life.

More from Money Talks News

Jul 9, 2014 11:28AM
Good article. I like the idea of not telling anyone.  Almost make like you never got the money in the first place. 
Jul 9, 2014 1:43PM
money doesn't buy happiness...but it sure helps!
Jul 9, 2014 1:19PM
Mostly make no change in life until you get settled and evaluate the situation, this is not enough money to quit your job and start living high on...... So plan it all out and pay your bills and invest the rest in quality investments. In about 10 to 15 years you might be able to retire and enjoy the rest of your life without worry..... Good luck.......  
Jul 9, 2014 9:50AM
the big point is to THINK and PLAN AHEAD before taking action
Jul 9, 2014 6:40PM
It's not like $800k is enough for you to kick back and retire at age 50 or even age 60.  I'd put 95% of it aside in an index fund for retirement and just keep working at my current job.  I have 7 times that amount saved up in my 50's and I'm not ready to retire yet.
Jul 9, 2014 1:22PM
get it into cash so no one can track it easy then get it out of the country as this place is going to hell. find a nice place to relax and watch the current government tax and regulate the country to death. then use the money to come back in and buy houses at 10 cents on the dollar
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