So what happens when you suddenly come into a large sum of money? Perhaps you were on the receiving end of an inheritance, got lucky in the lottery, or you found a bunch of Aztec gold in your basement. How you got the money doesn’t really matter, but for the purposes of this discussion I’m referring to some sort of one-time lump sum that you received. If you suddenly got a big bonus at work, that qualifies for this discussion, if you suddenly got a big raise it doesn’t.
Don’t shout about it on Facebook
Something like 40% of the population considers themselves to be the world’s foremost expert on how you should spend your money. Almost 100% of the population has a problem they think can be solved by applying more money to it.
If you suddenly come into some money people may overcome their sense of propriety and start bugging you about it. The larger the amount is the worse it will be. The more it appears that you didn’t “work” for the money (inheritances and lotteries for example) the worse it will be. Depending on how you came by the money some people may already know that you came into some money. That’s really too bad. You get permission to tell your CPA, and your spouse. (The rule for spouse’s and CPA’s is that if you can’t trust ’em, replace ’em.)
I know a number of 20 somethings whose own parents don’t know that they are sitting on a six figure net worth. Ultimately, there just isn’t any reason for most people to know about your financial situation.
Additionally, if you haven’t told anyone about the priceless treasures you dug out of the dirt in your basement, I estimate that it lowers the chances that you’ll be visited by the vengeful spirits of the restless dead. How would you like it if people started showing off treasure you hid long ago?
Make sure that you understand the tax implications of your windfall! Gifts generally avoid taxes and the taxes are generally the responsibility of the giver. Inheritance can have a tax associated with it depending on the size of the inheritance. Bonuses are taxable at your regular rate, and could possibly push you into another tax bracket. (Which only matters for the extra money). You want to make sure that you account for the taxes ahead of time and set aside to enough money to pay them. You don’t want to pay off a bunch of debt, or your house, and then realize that you owe the IRS $250,000 in taxes. It can help if you increase your 401K contribution substantially and use the windfall money to eat, rather than your salary.
Even the Aztec gold gets taxed. If you found a lot of it you might even end up giving up roughly half to taxes. You might feel inclined not to report this found gold on your taxes, but I wouldn’t take that risk. The curse of a doomed civilization is enough to worry about, you don’t want to wake up in a cold sweat over the IRS too.
Pay off Debt, Save and Invest
If you have high interest debt paying it off is the top priority for any money that isn’t earmarked for “makin’ sure you don’t die”. Just because this is “found money” doesn’t change anything. If you’ve ever played a real time strategy game you should know this. The first thing you do is get your economy stable.
If you don’t have any debt, great! You should strongly think about investing the windfall? While, you could go ahead and simply stick it all into the index fund of your choice all at once. Instead I recommend parceling the money out into 12-24 equal pieces and only investing one piece per month until you are fully invested. This will average your money into the market and reduce your risk of buying at a market top. This is called dollar cost averaging if you’d like more information on the subject.
If you came into Aztec gold you may want to do this as well. Rather than selling it all as a lump sum, instead sell some every month and transfer it into the market. This way you reduce your risk of selling it all at a particularly low price. Investing your filthy lucre is probably a better idea than sitting on it. The antediluvian ghosts which haunt you now have been around long enough to appreciate the power of compound interest. Investing wisely will make those unearthly horrors far less likely to vent their frustration on you.