What to Do With a Sudden Windfall | Financial Planning
Whether it's from an inheritance, legal settlement, business sale, or unexpected bonus, a sudden windfall can happen in different ways. Sudden wealth can also leave you feeling unprepared to deal with it emotionally and practically. We've all heard the stories of the lottery winner who ends up worse off than before. Or the superstar professional athlete who goes broke a couple of years after retiring. There's, of course, a smattering of reasons for this, some preventable, some not. However, we can all agree that a little strategy can go a long way.
In this guide, we'll discuss thoughtfully approaching a sudden financial windfall, from the initial mindset to long-term financial planning strategies.
1. Take Your Time
The most essential first step after receiving a windfall is to give yourself time, at least temporarily.
Sudden wealth often comes with strong emotions. For example, inheritances or wrongful death settlements may come alongside grieving for the loss of a loved one. A business sale or legal settlement might bring anxiety or feelings of loss of purpose. These emotional states make it difficult to make financial decisions.
Action Tips
Park the funds somewhere safe and secure while you wait for the right time to make significant financial decisions. A reputable FDIC or SIPC-insured institution is a good starting place. There is no rush to act. Individuals tend to make better long-term decisions when they give themselves time before making large purchases or investments.
2. Understand the Source and Tax Implications
The type of windfall you receive can significantly impact your tax liabilities and planning options.
Action Tip
Before using or investing your windfall, consult a fiduciary, certified financial planner (CFP®), or a qualified CPA to understand any tax consequences. Avoid making large gifts or real estate purchases until you know your net proceeds.
3. Build or Reinforce a Solid Financial Foundation
A windfall is an excellent opportunity to shore up your financial well-being and plan for long-term financial independence.
Key Priorities Might Include
A Cash Reserve Fund
Ensure 3–6 months of living expenses are set aside in stable liquid savings.
High-Interest Debt
Pay down credit cards or personal loans. This can offer a guaranteed return equivalent to the interest rate.
Health Insurance and Disability Coverage
Evaluate whether you're adequately protected, especially if you're self-employed or a business owner.
Action Tip
Use a portion of your windfall to eliminate risk and gain peace of mind. Financial freedom starts with a cash reserve for your monthly expenses and covering yourself in the event of an accident or unforeseen large expense.
4. Define Your Goals Before Investing
One of the biggest mistakes people make with sudden wealth is rushing into investments without aligning them with long-term goals and a plan.
Each of the life stages has very different planning needs. For example, are you…
A self-employed business owner thinking about scaling or exiting might want reserve capital to deploy toward business growth. Or, start a retirement income plan if the business is going to sell soon.
A near-retiree seeking income security and tax efficiency should start setting up assets for the beginning, middle, and end of their retirement years.
A family looking to buy a home or pay for college may want to utilize a taxable brokerage account to access funds penalty for a downpayment or a 529 college plan to save tax-free for future college expenses.
Action Tip
Work with a financial advisor or trusted partner to articulate your short-, mid-, and long-term goals. Your investment strategy should reflect your objectives and timelines, not just market trends.
5. Have a plan for giving
It's natural to want to help others when you come into money. Gifts, whether to family, friends, or charitable organizations, can be part of an intentional plan.
Consider These Questions First
How much can I give, and by when?
Which causes or people do I want to give to?
Are there tax-efficient ways to give?
Action Tip
Charitable giving strategies, such as donor-advised funds, can allow you to receive immediate tax benefits while supporting causes you care about over time.
6. Protect the Windfall From Lifestyle Creep
Once you have more money to spend, it's easy to raise your lifestyle expectations. This can lead to inflated spending on vehicles, travel, home upgrades, or recurring expenses.
Behavioral finance research indicates that people tend to recalibrate their perception of what is considered "normal" after experiencing luxury, a phenomenon known as the hedonic treadmill.
Action Tip
Permit yourself to enjoy part of the windfall. Set a specific "fun money" percentage (e.g., 5-10%) and stick to it. Keep the rest aligned with your long-term plan.
7. Create or Update Your Estate Plan
With greater wealth comes more complexity. Ensure your estate reflects your new circumstances.
What to Review
Wills and Trusts
Update to reflect your new assets and intentions.
Beneficiary Designations
Review retirement accounts, insurance policies, and bank accounts.
Guardianship & Medical Directives
If you have dependents, now is a good time to formalize guardianship preferences.
Action Tip
Work with an estate planning attorney to create a will or trust.
8. Consider Your Investment Growth Options
Windfalls can present an opportunity to create different income streams.
Options to Explore
Investing in a diversified portfolio of low-cost ETFs or Index Funds.
Short-term income funds include treasuries, bonds, or money market funds.
Possible real estate income generation through active or passive investments.
Alternative investments, like digital assets.
Caution
Do not rush into high-risk ventures or partnerships. If you're approached with a "once-in-a-lifetime" deal or something that sounds too good to be true, it usually is, and you can walk away.
9. Assemble Your Financial Team
Having the right experts by your side helps you make confident, informed decisions. Look for professionals who act as fiduciaries, meaning they are legally obligated to put your best interests first.
Your Ideal Team May Include
Fee-only CFP®
For objective financial planning and investment strategy
CPA or Tax Planner
To minimize tax exposure
Estate Planning Attorney
To protect assets and heirs
Insurance Specialist
To review your protection needs
Action Tip
Aquila Wealth serves as a fiduciary financial advisor for San Luis Obispo to our clients, offering fee-only advice without commissions or product sales. We aim to be your thinking partner and helpful implementer, not a salesperson.
10. Think in Terms of Stewardship, Not Just Spending
Sudden wealth is a chance to align your money with your purpose.
Questions to Reflect On
What kind of life do I want to build with this opportunity?
How can I ensure that this money helps myself, my family, and anyone else who is important to me?
What legacy do I want to leave?
Financial planning is not about restriction; it's about intention.
From Windfall to Well-Being
A financial windfall can change your life, for better or worse. With careful planning, expert guidance, and clear values, you can use it as a launching pad for lasting security, purpose, and financial freedom.
Start Here: Your Next Step With Aquila Wealth Advisors
Let's build a plan that respects your values, protects your future, and uses your windfall wisely.
Whether you're in San Luis Obispo or another part of the country, whether you're a business owner, near-retiree, or simply want to make wise choices with unexpected wealth, Aquila Wealth Advisors is here to guide you.
If you live in San Luis Obispo County or beyond and have recently received a financial windfall, let this be your permission to pause and make a plan. At Aquila Wealth, we help individuals with legal settlements, such as a wrongful death claim or an inheritance coming due.
Visit: www.aquilawealth.com
Serving: San Luis Obispo and beyond
