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What would you do if you had a stroke of financial good fortune during economic uncertainty?
A Mega Millions jackpot of over $1 billion had people rushing to pay $2 a ticket for a chance at a lifetime of financial security.
While it’s highly unlikely you’ll ever win big in the lottery, it’s okay to figure out how to get rid of credit card debt that’s been kicking around like a chronic backache. Or maybe you can finally afford a home or help others who are struggling to make do with higher consumer prices.
No wonder people are looking forward to microwave wealth. People fear a recession is coming or is already here and are concerned about how to deal with rising inflation and rising consumer prices.
But lotteries do not favor the masses. Big winners are extremely rare, and sometimes these mega wins can ruin lives. Gambling sells dreams of instant riches which, unfortunately, appeal to the people who can least afford to gamble.
In reality, more people are likely to get a windfall from an inheritance, an insurance payout, or from winning a lawsuit. Maybe next year your tax refund will be unexpectedly large.
If managed well, this bonus money can do some good. If not, his sudden wealth could just as quickly put him out of business.
Several people called my toll-free line (1-855-ASK–MAIL or 1-855-275-7678) have asked how to handle a windfall.
“I have waited four years to get a legal settlement related to being fired from my job,” Maryland resident Rebecca Ebaugh said when she called the toll-free line. “Now that it’s coming true, I don’t even know if I should even try to invest it with the economy being so dangerous right now. What would you do with close to $100,000?
This is what you would and would have done after receiving a windfall.
– Pause. Curb the urge to spend right away. Even if you are heavily in debt, wait.
Don’t rush any decisions until you’ve examined your entire financial situation. Maybe you need to build your emergency fund like I explain here, just a little bit, instead of using all the money to get rid of your credit card debt.
You still need a fund for rainy days. Otherwise, if a financial crisis hit him with no savings, he would go back into debt.
Earning bonus money can make you a bit reckless, so pausing gives you time to consider how best to use the funds.
We also tend to think of a windfall differently, as not real money but just play money. Pausing helps you resist the temptation to waste it.
— Park. Deposit the money in an interest-bearing account at a bank or credit union. You want something safe and short-term while you decide what to do with the money.
That’s what Ebaugh did. He parked his settlement in a money market account.
Two sites for finding deposit accounts with the best rates are bankrate.com and Investopedia.com.
– Plan. Take your time to develop a financial plan. Consider future financial needs, such as your children’s college tuition, retirement, charitable contributions, or family members you’d like to help. Once you think things through, you may realize that your first instinct to splurge on an expensive car or a luxury vacation isn’t the best use of funds.
— Pay for professional help. Find a tax advisor and financial planner.
The tax collector could come for some of your money. Generally, money received from lawsuit settlement and other legal remedies is taxable income unless exempt, according to the IRS.
“For damages, the two most common exceptions are amounts paid for certain discrimination claims and amounts paid for physical injuries,” the agency explains on irs.gov.
Ebaugh, 67, whose claims against her former employer included age and disability discrimination, said she is consulting with her tax accountant to determine her tax liability. She has set aside 30 percent of the settlement for taxes just in case.
If you’re not sure how to handle a large lump sum of money, consider hiring a financial planner. You can find a fee-only financial advisor by visiting the website of the National Association of Personal Financial Advisors (napfa.org).
Ebaugh spoke with his financial advisor and has invested his funds wisely.
— Put philanthropy in perspective. When money falls into your hands, it’s amazing how many hands start reaching for help.
Charitable donations may be part of your unexpected financial plan.
But be careful that your donation does not allow irresponsible family and friends. If you decide to share your wealth, set aside a specific amount of money that you’re willing to give, not lend. Stick to that limit.
Give of your extra. Don’t feel guilty about giving more than you can afford.
– Party. It’s okay if you’re not in debt or behind on your savings goals to have fun with your bonus money.
Ebaugh said her long legal battle made her very reluctant to celebrate his victory
I encouraged her to splurge a little.
“My husband made me promise that we were going to have a great meal, and we will,” Ebaugh said.
Source: www.washingtonpost.com