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Blog Archive October 2020



Optimizing A Financial Windfall

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As the recipient of an inheritance, a profitable business endeavor, or another means of monetary fortune, steps must be taken to achieve the greatest possible personal benefit. A drastic increase in one's financial level must be handled with due process and detailed consideration. Often, the misuse of funds results in the individual being in a worse financial situation than before the windfall. Here are some guidelines to consider if you should ever have the possibility to experience a windfall.

Initially, one should always stop to evaluate their situation. This is crucial. If the financial gain is due to an inheritance, you may be grieving and, therefore, emotionally and psychologically not in the frame of mind you would typically find yourself. If, for instance, the windfall is from a business endeavor that has caused you tremendous stress, you may feel justified in spending large amounts of money after the hardship you've been through, which you may later regret. If the payout is as simple as a lottery win, you may feel ecstatic but guilty, agreeing at first to give to all those that ask for donations, later realizing the list is never ending. Therefore, allow yourself time to assess your situation, accustom yourself to your new normal, and evaluate what steps, if any, you'd like to take. Having newfound wealth will likely have you reassessing and considering new life goals. In the meantime, your newly acquired funds can be safely allocated in a money market account or high yield savings account. A personal banker at Pan American Bank & Trust would be able to help you find the perfect account to suit both your short and long term plans.

Also, strongly consider enlisting the resources of a trusted financial advisor. They can suggest strategies to maximize your tax-deferred retirement contribution to offset the windfall or advise other ways to lessen the tax load of your higher tax bracket.

Before making big splurges:

  1. Ensure your future is optimized. If your 401 K is not maximized to receive your employer's full match, do so immediately.

  2. Consider funding a Roth IRA, which allows your investments to grow tax-free and will not penalize you with income tax if you withdrawal from it during retirement.

  3. Build an emergency fund if you haven't done so already.

Three to six months' worth of expenses is the average amount recommended, but it can be whatever amount you feel is necessary never to have to utilize your savings or be in debt.

Pay off any high-interest debt such as credit cards, title loans, or installment loans would be the next best move. The amount of interest saved if the balance is paid in full rather than payments made over several years is astronomical.

Once you've secured yourself financially, think about how you can improve yourself or make yourself happy. Is there a degree you've wanted to achieve? Are you aspiring to travel or learn a new skill? Have you tried to cut back your work hours to volunteer or be home with your children more? Is there a foundation you'd like to contribute to? Is there a relative or friend you'd like to help? Refer to your trusted CPA before offering monetary gifts to family and friends. Following tax guidelines will avoid unnecessary penalizations.

Once you've followed everything you "should" do, enjoy your elevated financial means and the security and benefits it offers.

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