Tips | June 8, 2015

Too good to be true? Six tips for managing a cash windfall

Many of us dream about receiving a windfall – an unexpected sum of money that could transform our lives.

We might fantasise about a lottery win, although the chance of winning the EuroMillions is only about one in 117 million.


More likely is a smaller windfall, perhaps an inheritance from a relative, tax refund or an unexpected pay rise. We might believe that – obviously – we would put it to good use.
However, tales abound of people ending up in a worse financial position even after a really big windfall.
Small amounts of “extra” money can also encourage us to spend more, as research shows.
In years to come we want to be happy with the choices we made today.

1. Is it a bonus – or more like a rebate? A windfall of any size is often thought of as a bonus that can be spent freely – as this study suggests. If we think of it as “free” money we may treat it differently from “earned” income, frittering it away or otherwise failing to get the most from it. However, this study suggests that if it is treated as a kind of rebate instead – something deserved or due – we may be less likely to overspend.

2. As much as you thought? First, work out if there are any taxes, fees or other charges to pay, and subtract them from the total. Inheritance taxes, for example, vary across countries and change over time. This might sound dull, but it’s essential – think of the saying about how death and taxes are the only certainties in life. It can help you take a more measured approach.

3. Needs before wants If you have debts, you probably know what you should do. In fact all borrowers can take stock and decide if they should pay off extra. Perhaps make extra payments on the most expensive debt first and then those with lower interest rates. Be on the alert for early repayment penalties and other potential fees as well. This eZonomics article offers several other tips.

4. Do you have cash for emergencies? If you do not already have savings for inevitable rainy days – perhaps as much three to six months’ earnings – put some aside for an emergency fund. This basic building-block might encourage better decisions about money too. Research shows people tend to make worse, more impulsive, spending decisions when their resources are limited, so a robust emergency fund may clear the mind and allow for smarter choices.

5. Invest in your longer-term future Spending the windfall now might be tempting – instant gratification tends to be – but it can be a good idea to think of years to come.
Psychology experts suggest we should think about who we might be in the future, when we could have quite different goals and priorities. Do you have a retirement plan?
Consider placing a little more into that. If you do not, it’s never too late to start one, as this USA Today article explains. Other future-proofing actions might be health insurance, or putting money away for life events such as weddings, funerals, or university.

6. Consider other opportunities Is it time to turn to professional advice? Investing in the share market or property might be appropriate depending on individual circumstances and risk tolerance – although the related risks are real and unavoidable. This eZonomics video has some ideas that may help. Two key concepts are to keep it simple and spread your exposure by diversifying.

Now comes the fun
There may not be much left of the original sum after achieving all that.
But if there is, we’re sure you don’t need any help from us on how to spend it.
It may finally be time to relax, and follow a long-held dream.
And remember, there is no rush to decide the most rewarding approach: money saved or put towards an ambition or cause close to your heart is never wasted.
Check out accounts and offers with good interest rates and minimal fees, and choose the best.

eZonomics team
.(JavaScript must be enabled to view this email address)

TipsIncomeMental accountingFramingLottery

Have your say

Would you tell your partner about any money worries?