3 things to do with a cash windfall

Key takeaways

• Most people know exactly how they would spend a windfall.

• Few people think about how to turn a windfall into greater long-term wealth.

• If you come into money, take a beat—cash doesn’t go bad sitting on the shelf while you make a plan.

• Get advice, follow it, and work with someone who knows how to execute your new plan.

Ask anyone what they would do with a sudden cash windfall, and the answer comes quickly. Pay off debt, buy a cottage, get a sports car, take a trip—it’s a no-brainer. No one ever says, I’ll multiply my winnings and turn them into greater wealth and financial resilience.

Fair enough. Answer #2 is boring. But it’s the right thing to do, and it will pay off immediately and way down the road when your kids thank you for not blowing it.

If you’ve come into a windfall or you’re expecting a large inheritance, that’s great. Here’s a quick guide on how to proceed with caution and make some strategic decisions about how that cash can be used to create the kind of financial independence most people only dream of.

Step 1. Take a beat 

Money doesn’t go bad. You can leave it on the shelf for a month or two, and it will be fine. Far too often, people who come into money set out on a mission to give it away as fast as possible. They give it to a car dealer, or a marina, or they buy real estate. Very quickly, money turns into things, and those things either lose value or come with expenses.

The question to ask is not, “What am I going to do with all this money?” The better question is, “How can this money make life better for me, my family, and generations to come?”

It takes a little time to answer the bigger question, so take a beat and get advice.

Step 2. Get good advice 

Well-meaning friends and family will have lots to say about how you spend your new money. They might give you advice on:

Unless they’re seasoned financial planners with a long-term view of wealth accumulation and taxes, these folks may unwittingly become co-conspirators in a plot to squander your once-in-a-lifetime gift.

Once the dust settles and your money is safely on a shelf, it’s time to review all of your options with your current financial advisor and perhaps someone new, if only for a reality check.

If the amount of money you received represents a significant improvement to your financial situation, you’re probably eligible for a new approach to wealth management, and you’ll have access to investments that require minimum amounts. It may be time to shop around and explore the investment opportunities that become available when you have a little more to invest.

Take some time to explore your options and keep your powder dry, as they say.

Step 3. Think long term

However you decide to manage a windfall, there are going to be long-term consequences that are tricky to calculate on your own. For example,

• Paying off debt reduces interest charges, but it limits how much you can invest in other places, like your retirement savings plan.

• Buying a cottage sets you up with monthly operating expenses that eat into your annual budget so you have less to invest.

• Gifting money to your children could give them the benefit of compound growth for decades, meaning you might feel comfortable leaving a smaller inheritance.

• Buying a sports car is fun until it depreciates, you start to miss the trunk space, and you wish you had put the money back into your tax-free savings account.

The point is, some choices will quickly erode the value of your windfall, and you may regret them. Other choices will lead to greater financial resilience, increase your financial security, and still let you enjoy a greater quality of life.

Step 1.  Get everything on one page.

Our planning tools let you view your wealth on one page. The process depicts every aspect of your plan, including how your money comes in, where it goes, and where you keep the money you save. Seeing everything on one page helps you see how all of your financial planning decisions are connected and how they affect each other.

Step 2. Decide how to spread your windfall around

Together, we make strategic decisions about whether to pay down debt, top up your investment portfolio, donate to worthy causes, or increase insurance coverage. Most likely, we’ll do all of these things in some combination. What matters most is that we continue to defend your wealth from erosion and identify every new opportunity to make it work even harder.

Step 3. Execute your new plan

We don’t just hand over a financial plan and expect you to make it happen. It’s our job to execute the ideas we recommend and counsel you on how to maintain financial resilience.

Once we determine the most effective way to distribute your new money throughout your financial plan, the team at David Cooke Wealth Counsellors sets out to identify the best investment and wealth protection tools for you.

As an independent advisory service, we’re free to shop the market and find the best solutions for you.

David Cooke is a Chartered Life Underwriter^® (CLU) and a Certified Financial Planner^® (CFP).