PAX Financial Group

How to Navigate Sudden Wealth … And How Not To

retirement, holistic financial planning, financial advisor San Antonio Jan 6th, 2020 by: Darryl Lyons

We all dream of the day when a sudden windfall lands in our lap. While it may not happen to all of us, if it does, it can change your life.

Whether you win the lottery, earn a promotion, receive an inheritance or sell a business, receiving a sudden windfall can take you by surprise.

What will you do with your newfound money? The knee-jerk answer may be “invest it all” or “buy an island,” but a better idea is somewhere in the middle. To determine what that move is, your first step should be contacting a financial group you trust. A financial advisor can take in your complete situation – your goals, debt, current financial picture and dreams – and help you make a smart decision.

There are countless ways you could use the money, but whatever your plans may be, one thing is abundantly clear: You don’t want to end up empty-handed six months from the day you receive it.

Instead of making an impulsive decision, use the money to create a better life for yourself. Invest it wisely. Maybe put those dollars to work and have them earn a passive income for you down the line.

But how do you do that?

At PAX Financial Group, we have worked with clients who found themselves in this situation. Here are some steps to take (and possibly more important, steps not to take) with a sudden financial windfall.

 

Financial planning is important. Contact PAX Financial Group to see how we can help.

 

Create a Plan for the New Money

If you don’t spend a few hours doing a little bit of planning, you can fritter your fortune away before you realize it. So, first things first, create a financial plan for your new money.

Start by evaluating your short and long-term financial goals. Do you hope to buy a house in two years? Reach financial independence and retire early? Create college funds for your kids? Leave a lasting legacy through philanthropic giving? Quit your job in five years and travel the world?

Whatever it is, put your goals in writing, and let them guide your decision-making process.

 

Pay Off Debt

Once you have a concrete plan in place, think first about paying off high-interest debt. Think of things like credit card debt, personal loans, title loans – really anything that has a more than 8 percent interest rate.

When the interest rates on your debt are higher than the interest rates on your investments, it’s hard to get ahead. No matter how well your investments perform, your debts can drag you further and further into a financial hole. So, your first priority should be eliminating them.

If you want to take it a step further, consider paying off all your debt (even the low-interest kind). Use your windfall to pay off your mortgage, auto loans, student loans or any other debt you have.

Once you’re debt-free, you’ll have more money to put toward your other financial goals.

 

Build an Emergency Fund

Do you have enough money in the bank to cover an unexpected emergency? If not, use a portion of your windfall to create an emergency fund or beef up an existing one. Ideally, you’ll want to keep three to six months of bare-bones expenses in this account.

If you usually spend $5,000 a month, but $1,000 of that goes to entertainment, dining out and shopping, base your emergency fund on $4,000 a month. There’s a good chance you’d cut all those extra expenses if you lost your job.

Keep this money in a high-yield savings account where you have access to it when you need it.

 

Increase Retirement Contributions

If your windfall is big enough, max out your retirement contributions for the year.

For 401(k)s, the maximum contribution limit for 2020 is $19,500, or $27,000 if you’re at least 50. For Roth IRAs, the limit is $6,000, or $7,000 if you’re at least 50.

A Roth IRA is funded with after-tax money, so you can max out the account with a one-time contribution.

However, 401(k)s are a little trickier. You can’t make a lump-sum contribution because the money is taken out of your paycheck before taxes. Instead, you’ll have to increase your contribution percentage with your company. This will decrease your take-home pay, but you can use part of your windfall to fill in the missing gap in your paycheck.

 

Invest

If you still have money left after you’ve paid off debt, created an emergency fund and maxed out your retirement contributions, consider investing it. The best investment strategy for you depends on several factors.

  • How old are you?
  • What’s your risk tolerance?
  • What does your investment timeline look like?

Instead of figuring all this out on your own, consider hiring a trusted financial advisor to help you develop a solid investment strategy that aligns with your needs.

 

Treat Yourself

You deserve to splurge a little while you’re chipping away at all those financial goals. Consider setting aside no more than 10 percent of your windfall to spend however you please.

If possible, take that trip you’ve been dreaming about. Buy that new car you’ve been drooling over. As long as it fits within your allocated budget, go for it. Just make sure your spending is intentional. Think through how you’ll use the money to ensure you get the best bang for your buck.

 

What You Shouldn’t Do When You Receive A Sudden Windfall

Just to be extra thorough, here are a few things to avoid doing when you receive a sudden windfall.

1. Make Any Sudden Changes

Once you find out you’ve landed a windfall, don’t do anything for the first six months. Stop, take a deep breath and process your emotions. Don’t go on a spending spree. Don’t lend money to family and friends. Don’t even donate to charity. For at least six months, act like your windfall doesn’t even exist.

Use this time to really think about how you want this money to change your life. The last thing you want is to end up like those multi-million-dollar lottery winners who file bankruptcy a few years after winning.

2. Do It Alone

While a windfall is a great thing, it often comes with tax implications, family drama and unnecessary stress as you sort through your options. In times like these, it can be a huge benefit to turn to a professional financial group.

At PAX Financial Group, we’re dedicated to guiding our clients toward a safe and secure financial future. If you’ve received a sudden windfall, we can help you create a financial or estate plan, facilitate family meetings, develop a strategy to reduce your tax burden and talk through your plans. If you have questions, contact us today.

 

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This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.

Darryl Lyons

Darryl Lyons

CEO and co-founder of the PAX Financial Group, Darryl Lyons has been a licensed professional in the financial services industry since 1999. A lifelong Texan, Darryl began his career in the financial sector just one day removed from earning his bachelor’s degree in corporate financial management and accounting at St. Mary’s University. Throughout his career, he has won awards for recruiting and development from Fortune 100 companies. In January 2007, he chose to begin and develop his independent practice. He joined Andres Gutierrez and Joseph Schuetze to form the PAX Financial Group. Darryl also served as the Chairman for Brooks Development Authority. Shortly after his service, Mayor Julian Castro, named a park “The Darryl W Lyons Park” in honor of his service. He was named to the 2010 San Antonio Business Journal’s “40 Under 40 Rising Stars,” which honors people making a difference in business and in the community.