What's a Financial Windfall Plan? (And How to Make One)

financial windfall plan

By Lacey Langford, AFC®

Money doesn't grow on trees, but if you're lucky, it can fall in your lap. And when it does, it's called a financial windfall.

A financial windfall is often an unforeseeable financial gain. It's a large amount of money you weren't expecting or planning to receive.

With a little planning, receiving a windfall can be an opportunity to get ahead and build wealth. It can be a quicker path to building an emergency fund, paying off debt, or saving for retirement.

On the other hand, not using a strategy for your unexpected cash can lead to missed opportunities, and sometimes to financial problems.

Here’s how to create a financial windfall plan, so you have a strategy for putting any extra money to work for you.

Why you need a financial windfall plan

As a financial coach, I’ve worked with several people who have received financial windfalls.

I've coached windfall recipients that created and implemented a plan allowing them to get financially ahead by paying off consumer debt and building up a big emergency fund.

I've also dealt with people who received windfalls and proceeded to mismanage that money.

One memorable man used a work bonus to buy a used red corvette and increase his quality of life by purchasing new clothes, going out and getting an expensive apartment. The only problem was he spent more than the bonus he received.

As a result, he ended up going into more debt, was evicted from his apartment, and ended up living in his used red corvette.

Your money management practices don't change overnight when you come into money. If you aren't managing $1,000 well, you aren't going to manage $50,000 or $3 million well.

That's what happened in the case of the little red corvette. The owner wasted away his windfall because he never changed his financial habits or created a map for his newfound money.

That's why designing and implementing a financial windfall plan is vital to help your overall financial well-being. So you can make the right choices, both for you and your financial future.

What is a financial windfall plan?

A financial windfall plan is a strategy for what you’ll do with any extra money you receive so you have enough to cover taxes, work towards your financial goals, and maybe even treat yourself a little.

A windfall plan begins with understanding your new money, how to use it in the best possible way, and how to get help if you need it. There are also ways you can be proactive in creating your own financial windfall.

How much money is considered a windfall?

A windfall can be any amount over $1,000. But in reality, a windfall is any amount of money over what you usually have. If you're used to earning $4,000 per month and get a gift of $500, the gifted cash is a financial windfall.

Types of financial windfalls

Sometimes people aren't aware that the money they get is a "windfall" and proceed to add it to everyday spending or their checking account. This can lead to the funds being mismanaged and not used to their fullest potential.

Identifying when you've received a windfall is an integral part because it gets you in the right mindset to make smart financial decisions about the extra funds.

Here are some types of financial surprises.

Lottery winnings

Often when people think of a windfall, they think of winning the lottery. The odds aren't great, but If you buy lottery tickets or scratch-offs, this could be the way you get a prize.

With this type of windfall, you may have to decide on your payout method. The most common is a cash option or an annual annuity option, but that can vary by state. It would be worth it to talk with a financial planner before making that decision.

Tax refund

Calling a tax refund a windfall is debatable because the money you receive back is your money. The IRS has just been holding it all year in case you owed taxes.

But if you receive a large refund, you still want to have a plan for that extra money to ensure it's used in a way that helps your overall financial health.

When you continually receive a refund, most financial professionals would recommend adjusting your withholdings to have more money in your paycheck each month versus a return at the end of the year. The IRS provides a withholding estimator to determine if you're having the right amount withheld from your paycheck.

Inheritance

An inheritance is money (or assets) passed on to you after a loved one dies. But an inheritance means you will most likely owe an inheritance tax on the money.

Gifts

Financial gifts are money you receive as a gift. They can vary in amounts, but because it's more money than you had before, it's a windfall and can be used to improve your finances and quality of life.

Work bonus or raise

A bonus or raise from your employer could be a big financial boon, especially if you weren't expecting it. Examples of a bonus would be a signing bonus for a new job or a retention bonus to keep you in your current position.

Settlement

Receiving a substantial sum as a settlement to a lawsuit is also a windfall you might need to plan for.

What to do with windfall money

The bulk of your financial windfall plan comes down to what you will do with the extra money you receive. Your plan is going to depend on your current financial situation and goals, how much money you receive and your money management skills.

Here are some components to consider for your plan based on your situation.

Pay taxes

When there's a windfall, Uncle Sam is close by to make sure he gets his cut. Determining how much money you owe in taxes is the first thing you need to do. Most likely, you'll owe some type of tax: federal, state, income, or estate tax.

Hiring a Certified Public Accountant (CPA) could go a long way to make sure you handle your tax obligation properly.

Hire a Certified Financial Planner

If you have more money than you know what to do with or you need some financial accountability, hiring a financial planner might be the best way to go.

A financial planner can give you advice and guidance based on your individual circumstances and help with wealth management. They may even be able to save you money in the long run.

Pay off debt

Sudden wealth can get you quickly caught up with your debt obligations. Take the extra money and pay off or down your debt. By doing so, you'll free up extra cash in your monthly budget and save money on interest by paying off debt early.

Build an emergency fund

A windfall is perfect for funding an emergency fund. It's money you weren't expecting that can be used for financial emergencies you weren't planning.

If you don't already have money set aside for emergencies, it's wise to save 3-6 months of your living expenses. You'll be glad you did when life throws you a curveball.

Save and invest for retirement

Why not use unplanned money for your future self? You can use the money to fund an Individual Retirement Account (IRA) for you and/or a spouse. The investment will grow and potentially provide you a greater return when it's time for your retirement.

Increase quality of life

It is wise to use the majority of a monetary windfall to get in a good financial position, but you also want to enjoy the unexpected gift a little. Set aside a small portion of the money to increase your quality of life.

How much you set aside depends on your financial state, but consider using 5-15% of your windfall for fun money. Perhaps you can use the money to upgrade your cell phone or wardrobe.

If the amount you receive is great enough, you can use it for a trip or an item you want. But don't forget, if your goal is financial health, it's best to take care of debt and savings first.

How to create your own financial windfall

You don't just have to cross your fingers and hope for a windfall. You can be proactive in making one.

Buying lottery tickets may earn you a prize, but according to Powerball, the odds of winning their grand prize are 1 in 292,201,338.00. The odds aren't in your favor, plus tickets cost money.

Here are ways to create a windfall with better odds of success and without the expense of lottery tickets.

Salary bonus

If your employer offers a yearly bonus, often, they outline what goals you need to meet to receive the bonus. If they don’t, ask if they’ll work with you to create this outline. You can then take action to ensure you meet the requirements to get the bonus.

If you are looking for employment plus a windfall, why not look for potential jobs that offer a signing bonus to create your own windfall?

Ask for a raise

A quick way to get a windfall is to ask for a raise. A raise will not only be an immediate financial boon, but it will also be an increased source of income over time.

To get a raise, you could make a list of work areas you're excelling at. Or figure out how much money you're saving the company by performing certain tasks, or by systems you created.

Another option is to research your position within other companies to find out if your salary is on target with others. It may be that you're underpaid, and the salary research you provide is evidence to support your request for more money.

Bottom line

When you're fortunate to have money come your way, don't miss the opportunity to get ahead. Take time to make a financial windfall plan to get out of debt, build up your savings and improve your quality of life. This way, your money is working for you and a healthy financial future.

About the author

Lacey Langford, AFC® is The Military Money Expert® and the founder of LaceyLangford.com, a personal finance blog specializing in the unique world of the U.S. military. Lacey's the creator and host of The Military Money Show, a podcast dedicated to helping the military community with personal finance. She's an Accredited Financial Counselor® with over 15 years of experience in financial planning, counseling, and coaching. Her education includes an Executive Certificate in Financial Planning from Duke University and a B.S. in Finance from the University of North Carolina at Wilmington. As a U.S. Air Force Veteran, military spouse, financial coach, speaker, and writer, she changes people's lives from being fearful of money to having control and confidence with it.

Written on January 21, 2020

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