5 Things You Shouldn’t Do With a Windfall

Making drastic changes can create problems for the newly wealthy.


Wouldn’t it be great to be on the receiving end of a large windfall? We’ve all got our own ideas about what a large windfall might be. Some might think that $20,000 is a hefty amount, while others require a sum ten times that amount to make a dent in their finances. But it doesn’t matter what the actual sum is; it only matters that the sum is a windfall to you.

[Slideshow: 10 Things to Splurge on This Summer.]

There are both wonderful and foolish things you can do with a windfall. Blowing the lot would be an exceedingly bad thing, while giving it all to charity would be selfless and very generous. Either way, you'll need to give this money some careful thought before you put it to work. At any rate, should you ever be in the lucky position of being on the receiving end, here are a few things you should try NOT to do.

1. Don't start giving away your money. We all want to be generous of course, and we’re not suggesting you shouldn’t be. But don’t make commitments right away. The likelihood is that your windfall will have come as something of a surprise. So give it time to sink in and keep that money in a safe place for the time being. Don’t make any knee jerk decisions, no matter how sensible they might seem at the time. Figure out your financial priorities before taking action.

2. Don't start spending it all. Don't make immediate spending plans just because you've got the means to do this now. Just as you shouldn’t start handing out your money to other people until you’ve had time for the news to sink in, don’t spend it all right away. A cooling off period does a lot of good to get your head on straight. A better move would be to first invest in financial software or a budgeting tool like You Need A Budget to get a good picture of your planned expenditures.

3. Don't invest your windfall without prior advice or consideration. You may be tempted to start opening a series of accounts with investment companies, banks or online brokerages. And certainly, you’ll want to take some good advice from an investment expert or independent adviser before figuring out what to do with a large sum of money. But even when you have that advice, don’t just agree with what they recommend, or blindly execute the plans they've suggested for you. Instead, take the guidance of experts (several, preferably), and think about what makes sense to you and what you're comfortable doing, before making any big moves. This is your money, after all.

4. Don't start a business without adequate preparation. History is littered with people who suddenly decided to become business moguls, only to find out a little too late that they didn’t have the skills or the know-how to be entrepreneurs. Before you decide to go into business for yourself, make sure you have carefully assessed the risks involved and your ability to run the business. Be honest with yourself about this. Too often, people who suddenly acquire resources to start a business get ahead of themselves and allow their giddy emotions and blind enthusiasm to control their decision-making.

[See How to Build a Smart Wardrobe on a Budget.]

5. Don't do anything you wouldn’t normally do. This is an unusual point, but it's worth bringing up. If you are used to living a certain way, it’s because you’ve made many, mostly prudent choices to get to where you are today. If you are happy with your current lifestyle, you may want to think twice about making big changes to your life simply because you now have the money and the means to do it. You could have been left $20,000 from someone’s will, or you might have won $2 million by playing the lottery. Whatever you win, don’t let it change your financial habits –- unless it’s for the better!

We can probably think of quite a number of incredibly foolish things that we could do with a windfall. But allowing yourself enough time to think of your options and to plan accordingly can help you avoid making mistakes you'll regret later. By taking the time to stop and think before doing anything in this situation, you can get the best out of the financial gift that you've received. After all, you may only have just one chance to get it right!

Silicon Valley Blogger is a full time blogger and online entrepreneur who writes for The Digerati Life and The Smarter Wallet sites that cover general personal finance topics ranging from investing and saving to credit and debt management.