Managing A Financial Windfall

Have you thought about what to do if you come into a windfall of money?

Imagine waking up one morning to find yourself suddenly blessed with a significant sum of money—a windfall that could change your life in an instant. Whether it’s an inheritance, lottery win, or unexpected bonus, managing a sudden inflow of wealth can be both exciting and overwhelming and requires careful consideration and planning to ensure it serves you well in the long run.

Here are some common forms of windfalls:

  • Legal settlements: Settlements include personal injury settlements, workers compensation and settlements of employment discrimination.
  • Inheritances: These often include retirement accounts and assets held in trust.
  • Gifts.
  • Lottery winnings: Taken as a series of payments; or as a lump sum.
  • Insurance settlements: These can be death benefits received as either a lump sum or annuity; as pre-death cash surrender values; or as life settlements, the sale of a life insurance policy by the owner to a third party in exchange for a lump sum.
  • Lump sum payments from an employer: These can be bonus payments or large lump sum severance or retirement payments.
  • A real estate sale.
  • The sale of a business.
  • Cashing in shares from stock options or an IPO.

So, have you ever thought about what to do if you come into a windfall of money? Or how an unexpected bit of cash might change your life?

We’ve all read those stories about lottery winners eventually going bankrupt. It doesn’t mean you can’t spend some of this money, but it’s important to have a certain lifestyle established to prevent yourself from spending too much money or falling victim to fraudsters. Have fun but be smart! Splurging is fine as long as you have a firm plan for the rest of the money.

Regardless of how much money you have or don’t have, you should save according to your financial goals.

Beware of Fraud and Scams

Along with newfound wealth comes the risk of being targeted by fraudsters and scammers seeking to exploit your good fortune. It’s important to remain alert and protect your windfall from potential threats.

One way to help stay safe is to keep a low profile. While it may be tempting to share news of your windfall with friends and family, exercise caution when discussing your newfound wealth publicly. Long-lost friends and family members might have an interest in reestablishing ties to get to your money. Avoid posting about it on social media or disclosing sensitive financial information to strangers. Keeping a low profile can help minimize the risk of attracting unwanted attention from fraudsters.

Here’s some more ways to protect yourself from fraud and scams after coming into a windfall of money:

  • Beware of Unsolicited Offers:

    Be wary of unsolicited offers, emails, phone calls, or letters promising lucrative investment opportunities, lottery winnings, or inheritance claims. Fraudsters often use these tactics to lure unsuspecting individuals into scams designed to steal their money or personal information. Remember, if it sounds too good to be true, it probably is.

  • Verify Identities and Credentials:

    Before engaging with anyone who claims to represent a financial institution, investment firm, or government agency, verify their identities and credentials. Legitimate professionals will be registered, licensed, or regulated by relevant authorities. Take the time to research and confirm their legitimacy before sharing any sensitive information or entering into financial agreements.
    You can search the CSA’s National Registration Search database for information pertaining to individuals registered with a Mutual Fund Dealer and/or firms that are registered as both a Mutual Fund Dealer and Investment Dealer.

  • Protect Personal Information:

    Safeguard your personal and financial information from unauthorized access or theft. Avoid sharing sensitive details such as your Social Insurance Number, bank account numbers, or passwords with anyone. Be cautious when providing information online and use secure channels for communication.

Even after taking precautions, remain vigilant and stay proactive in protecting your windfall from fraud and scams. Keep up to date on emerging threats and scams, review your accounts regularly for any unauthorized transactions, and continue to educate yourself about best practices for financial security. Having a trusted team of financial professionals can help you weigh any potential requests for money—from loans to gifts and investment opportunities. Please visit CIRO’s Avoiding Fraud and Protecting Your Investments section for more information.

Think About Your Current Financial Situation

This is a wonderful opportunity to jump over major financial milestones, but it’s important to have a good idea of the actual amount you have to play with to make the right choices.

  • List what you have (your assets) and what you owe (your liabilities).
  • Make a budget to help you manage your money and figure out how much money you get, spend and save. Check out the FCAC’s Budget Planner tool.
  • Calculate your net worth by gathering all the information you need (RRSP, TFSA, car loan, mortgage, etc.). For example, if you have debt a top priority may be paying that debt off.

It might sound like a bad joke, but “Keep Your Day Job” is something you should consider if you can. It’ll be tempting to walk away from the 9-to-5 routine, but keeping your job is a smart long-term way to keep your windfall. It's easy to underestimate the amount of money you would need to invest to make up your income. Be mindful that quitting your day job also means your public pension contributions stop. You may need those payments for income if your investments go through a decline.

If you honestly can’t stand your current job, however, a financial windfall can offer the breathing room to help you decide what’s next in your career. You can create a plan to leave behind a career you never enjoyed, while mapping a path for your new career.

Think About What is Important to You

The possibilities are endless, and the decision may depend on your age and stage in life.

For example, purchasing a home while you're young and don't currently have one, either completely debt-free or with a very modest mortgage, might be a huge life boost. It's not only a real estate investment, but it also significantly lowers your living expenses going forward. However, someone in the middle of their career could begin to consider an early retirement. Keeping that money invested for a few years may boost the returns and have the most effect when they do eventually retire.

No matter how old you are if you receive a windfall of money, you can make if work toward securing your future. Even with only a few years to let compounding interest work its magic, you can grow a single windfall into a longer-term benefit.

One option is by maxing out your retirement fund contributions each year and taking advantage of the magic of compound interest to help fund your future. For example, if you were to add $5,000 each year to a traditional RRSP, with a conservative annual return of 6%, after 20 years, you could have a nest egg of $199,963. Read our article on “Compound Interest” to learn more on how compound interest can turn small investments into large sums over time.

Investing capital and earning a good rate of return for an appropriate level of risk, is key. Which investments are appropriate depends on the time horizon of the goal you are saving for. For example:

  • Short-term goals, within the next 3 years. Save using low-risk and low-volatility investments, such as savings accounts, money market accounts or funds, certificates of deposit (CDs), or short-term bonds.
  • Medium-term goals, in the 3–10-year range. Save with slightly more volatile investments, such as intermediate-term bonds, and could include a small percentage of stocks.
  • Long-term goals, 10 or more years. These can contain a larger percentage of higher-volatility higher-return investments like stocks and real estate.

Be careful with high-risk investments (private equity, crypto assets and startup companies) that have a big chance for total loss.

Many windfall beneficiaries do not have the needed experience to assess high-risk investments, and also do not have the need for higher than market returns.

Have a Plan and Make a Decision

After you become comfortable in your new financial reality, you may be ready for the next step. This is the fun part!

You could do anything you want—and choosing from so many options may be difficult. Before making any major financial decisions, consider consulting with a registered financial advisor. They can provide personalized advice based on your financial goals, risk tolerance, and tax situation. A financial advisor should be able to help you with:

  • Calculating whether it is better to receive a lump sum or annuity stream of payments from a settlement, lottery winning, or retirement package;
  • Strategizing about how to minimize taxes owed;
  • Recommending an investment strategy; and
  • Recommending any additional types of insurance you may need, or what current types of insurance you hold that may no longer be needed.

With the help of a qualified expert, you'll be able to make the best decisions and draw up a structured financial plan. Learn more about choosing a registered financial advisor.

Financial planning is an ongoing process of controlling your finances so you can achieve your goals. Essentially, the process for financial planning after receiving a windfall is the same as in any other situation. Some differences are:

  • Larger amounts of money increase the value of certain parts of financial planning, such as tax planning and tax-efficient investing, minimizing investment costs, asset protection, and estate planning.
  • Windfall beneficiaries are often plunged into a situation where they need to manage a large amount of money without having the necessary skills, knowledge, and experience. The tax implications of the windfall will also need to be investigated.
  • Serious emotional shocks often surround windfalls, which must be dealt with at the same time as financial planning.
  • The effects of financial mistakes are higher, in terms of absolute dollars, with larger amounts of money.

Here are a few key factors to think about when managing a windfall:

  • Pay Off High-Interest Debt:

    If you have outstanding debt, such as credit card balances or personal loans, or mortgages consider using a portion of your windfall to pay off these obligations. Eliminating large and high-interest debt can save you money on interest payments and improve your overall financial health. For additional information and an interesting read, see “Paying Down Debt vs. Investing”.

  • Tax Implications:

    Be aware of the tax implications of your windfall. Depending on the source of the funds, you may be subject to income tax, capital gains tax, or inheritance tax. Consult with a professional to understand your tax obligations and explore potential strategies for minimizing taxes legally.

Have Fun But Be Smart

Managing a windfall responsibly requires thoughtful planning, disciplined decision-making, and ongoing financial management. By taking the time to consider these factors and seeking professional guidance from a registered financial advisor, you can make the most of your newfound wealth and secure a brighter financial future.