How to Manage a Windfall

1. Pause and Plan

To avoid blowing through all your newfound cash—and then wondering where it went—you need a plan. Start by taking stock of your financial situation.

Ask yourself these questions:

• Do you have debt to pay off?
• Do you need to build an emergency fund?
• Can you easily pay your bills each month, or are you struggling to make ends meet?

Knowing where your finances stand can help you prioritize the best uses for a windfall, whether that's paying off debt or taking that dream trip around the world.

2. Protect the Money

Receiving a windfall can mean having a lot of cash on hand. The last thing you want is to lose it before you can use it. That means stuffing the money under a mattress is not advised.

If you haven't already, put the cash in an insured account at a bank or credit union. Deposit accounts in the U.S. are generally insured up to $250,000 per account holder, per account category and per bank or credit union. To confirm, you'll want to make sure the institution is FDIC- or NCUA-insured. If your windfall exceeds this limit, you can split it between multiple banks or credit unions (insuring up to the $250,000 limit at each).

Stocking your money away in high-yield savings accounts will earn you interest as well as protect your money. You might also consider depositing the money into a cash management account. These accounts, held at brokerage companies, sweep your deposits into partner banks. By holding your cash at multiple institutions, cash management accounts often tout higher insurance limits.

Tip: Insuring your money is the first step in protecting it, but don't stop there. Learn how to avoid identity and credit fraud.

3. Understand Taxes

Don't start allocating your windfall before understanding your tax liability. Prizes and winnings are usually taxed as ordinary income. As for lottery winnings, the IRS generally withholds 24%, but that may not be enough to cover your tax liability based on your income and other factors.

If your windfall comes in the form of an inheritance, you may have to pay estate and capital gains taxes.

To be safe, consider hiring a tax advisor to ensure you're setting enough aside come tax time.

4. Set Long-Term Goals

If you've been living paycheck-to-paycheck, you may not be used to planning more than a few days ahead. But with an influx of cash, it's time to start thinking about setting long-term financial goals.

For example, you may feel compelled to:

• Buy a house
• Retire early
• Give to charities, family members or friends
• Put kids or grandkids through college

There's no right or wrong here: Setting long-term goals is about clarifying what's important to you.Once you've identified some long-term goals, you can start allocating your money accordingly. For example, if you have a goal of buying a house, you might put a portion of your windfall into a separate down payment savings account.

5. Build Your Safety Net

Most experts agree that an emergency fund is a key part of any financial foundation. So if you don't have a cash cushion set aside, this might be a good place to start delegating your windfall.

Common advice says to save three to six months' worth of essential living expenses in your emergency fund. That way, if you lose your job or face other financial hardship, you can handle your bills for a while without having to go into debt.

Use this guideline as a suggestion, not a rule. For example, if your employment feels particularly unstable, you might use your windfall to save for an entire year's worth of expenses.

Learn more: Steps to Build an Emergency Fund

6. Tackle High-Interest Debt

High-interest debt like credit cards and personal loans can add significant stress to your life. Not only will this debt take a huge bite out of your budget, but high interest rates mean they can snowball quickly.

If you have a balance on your credit card or a high-interest loan, receiving a windfall may be a great opportunity to get that debt under control. Not only will you have a lot more wiggle room in your budget, but reducing credit card balances can also help you improve your credit.

Investing embed

7. Invest Strategically

If you play your cards right, you can potentially grow your recent windfall—not just spend it. Investing the money in income-producing assets can help you continue to grow your wealth over the years and decades to come.

If you haven't been saving sufficiently for retirement, you might start by contributing (or contributing more) to retirement accounts like an IRA. Beyond retirement accounts, you can invest with a brokerage account or via other methods, such as buying real estate or a small business. Whatever path you take, ensure you diversify your investments to minimize risk. You can also consult a financial advisor if you want professional guidance.

Learn more: How to Save for Retirement

8. Consider Discretionary Spending

While it's important to be smart with your windfall, you should also have some fun. Once your financial needs are taken care of and you've looked out for your future, it's OK to spend some of that money on discretionary purposes—just because you want to.

Maybe you've been dreaming about an Italian vacation, a bathroom renovation or a fresh wardrobe. If it aligns with your goals and you have the money, now might be the time to treat yourself.

The Bottom Line

Receiving a windfall can certainly be exciting, but feelings of overwhelm and anxiety about managing such a large sum of money are also completely normal. Before spending the cash on the latest trend or buying into your uncle's high-risk "investment opportunity," consider your financial situation and personal goals. There are many smart ways to spend a windfall, but the best plan is unique to your circumstances.

With an influx of cash, protecting yourself and your money from potential fraud is critical. Experian's free credit monitoring will alert you to changes in your credit report while also allowing you to keep an eye on your credit report and FICO^® Score^Θ. This can help you spot potential fraud and take action to protect yourself sooner.