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I Just Got a Lump Sum of Money: What Do I Do With It?

Insights

Life has its twists and turns, yielding unexpected costs and income. When faced with a windfall of cash, what should a business owner look to do with the funds?

First, we know that money won feels differently from money earned; this helps explain why Vegas and casinos exist—the thrill of winning money. Money won practically feels free. And with that feeling, it’s easy to squander the money, not making the best use of it.

For individuals receiving a lump sum of money, it’s best to build out a plan before the money and temptation arrive. The larger the windfall of money, the bigger a need for a plan.

We suggest physically writing out the plan and having both spouses sign the agreement. This way you feel an obligation to each other and avoid frivolous purchases. It also helps avoid you redirecting the money to a flavor of the month expense like a pool or new car. 

Putting money to work should follow a waterfall of priorities—needs, wants, wishes. Below are some considerations on how to utilize a windfall of money, no matter the size.

 

Step 1: Emergency Savings

“Cash is King” sounds great but the truth is “Cash is Comfort.” Cash protects you against unexpected income loss and expenses. We typically see wealth accumulators with 6 – 12 months of expenses in cash. Retirees should have 6 – 24 months of cash on hand. 

Each family should have its preferred level of cash because the right number is ultimately a matter of personal comfort. Some people are perfectly fine with just six months of cash because they have a stable job and low overhead. Professionals with more variable income (e.g. salesperson, start-up founder) should have additional cash set aside.

If the windfall of cash does not meet at least six months of household expenses, stop and allocate all the funds here. Having that peace of mind and financial freedom are the foundations of your finances.

 

Step 2: 75% of Windfall to Savings

Very few executives ever feel like they have enough money set aside. Using additional money to save for retirement may not feel rewarding, but the impact of this money can multiply with time.

By allocating the majority of the windfall to savings and retirement as it allows you to take advantage of compounding interest and gains. This way you are able to double or triple the windfall in the coming decades.

With the funds invested for retirement, the question becomes where to save this money. 

For business owners and executives able to invest cash into their business, this decision offers the greatest risk-reward proposition. Whether it’s hiring an additional staff member or building out a product line, using the windfall of money on the business can be very rewarding. Executives and business owners also prefer investments that make them feel in greater control over the outcome, which would be the case with investing into the business.

If the business cannot benefit from a greater investment, it’s better to save money in 401(k) and IRA’s. These accounts allow the owner to defer taxes on gains. Additionally, dividends and interest paid from the investments are not taxed until they are withdrawn.

What if you’re already maxing out your 401(k) and IRA? Now you move onto saving in a taxable account, where the income and realized gains are taxed annually. While less efficient than IRA’s, these accounts can be accessed prior to 59 ½. This liquidity is very attractive as it allows you to sell and reinvest the assets in other investments, such as income producing real estate.

 

Step 3: 25% of Windfall to Spending

People typically look at personal finance decisions as an “either-or” decision. This is simply wrong and limits the value of your windfall. 

Unless all of the windfall needs to be used to fill your rainy-day savings fund, consider using 75% of the remaining funds for retirement and 25% to spend on a want or wish. And don’t worry if that want or wish ends up costing extra. Life’s short and you can responsibly enjoy today.

Ultimately, where this money is spent will be a personal decision. Just think of it as a way to enjoy today by either doing something special or fixing a nagging problem with the house.

By using the windfall for both retirement and your wants, you create an outcome that is both responsible for the future and feels good today. This is important because you are minimizing regret from feeling you squandered the money on an impulse buy or investing right before stocks entered a bear market. 


This report was prepared by Delta Wealth Advisors a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name. 
This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report. Information in these materials are from sources Delta Wealth Advisors deems reliable, however we do not attest to their accuracy.