Managing a windfall (like a bonus or inheritance)

Tips and to-dos from money guru Jean Chatzky

The Center on Wealth and Philanthropy at Boston College estimates that $36 trillion will be inherited from 2007 and 2061—the largest transfer of wealth in history.¹ Many people come into large sums of money every year through bonus pools or stock options. A lucky few even win the lottery. And yet, the National Endowment for Financial Education estimates 70% of people who receive windfalls blow the entire sum within a few years. Don't like the sound of that? Follow these steps instead:

□ First, do no harm:

The Hippocratic Oath actually works quite well here. Don't quit your day job. Make no promises. And give yourself a good six months to a year before you make even your first financial move. You need to think, hard, about what you want this money to do for you and others in your life. So, consider parking the money somewhere safe—a money market account, for example—where you won't use it or lose it.

□ Allow a little splurge:

If you're feeling the need to splurge in some small way—particularly if you earned this windfall—give into it. But make the splurge a small one (no more than 5% of whatever you've received). Then guarantee you'll keep your hands off the rest by putting it into an account where you won't see it on a daily basis.

□ Rally your advisors:

You'll want to get advice about the best way to handle this financial opportunity from a financial advisor (who can help you map out a strategy to use the money to do what you want it to do), an accountant (who can help you consider the tax consequences), and, perhaps, a therapist. Large sums of money have the potential to be life- and relationship-altering, and not always in a good way. And if the money came through an inheritance, that may raise other emotional issues better dealt with sooner rather than later.

□ Firm up your financial base:

One thing to consider is using some of this money to build a truly strong financial foundation. That means eliminating high-interest-rate credit card debt, fleshing out your emergency cushion so that it could get you through three to six months of unemployment, increasing your retirement plan assets so that you're on track to have saved 1x your salary by age 30, 3× by age 40, 6× by age 50, 8× by age 60 and 10× by 67.² (Paying off student loans or mortgages are frequent wish-list items, but because of their relatively low interest rates, you may get a better return by investing your money.)

□ Think bigger:

Then turn to your long-term picture. What do you want this money to do for you and the people and causes you care about? Is this the money that will put your children through school debt-free, enable you to transition to a new career, make a gift to an organization your parent (or whoever left you the money) might value, or buy a second home where your children and grandchildren can gather for years to come? The key is to plan it out—with help from your team—so that you can see roadblocks before you run into them.

□ Put your money to work:

Your goals will dictate your investment strategy. Money you need in the next three years shouldn't be subject to market risk. As your goals get further away, you can take more risk with the funds. But remember that this is money with emotion attached. Ask yourself: How would I feel if the value of my portfolio dipped 20 or 30 percent in the short term? If the answer is, "unable to sleep," dial back your risk until it matches your risk tolerance.

□ Consider giving some away:

Research has shown that one way to increase the amount of happiness you get from your money is to give it to causes you believe in. Consider opening a donor-advised fund or a giving account. You make your donation to the fund (moving money out of your estate) and take a tax deduction in real time. The money is invested for growth. Then, when you're ready, you direct the money to be given to the charity of your choice.

□ Adjust your own estate plans:

Finally, you'll want to add another member to the team—an estate planning attorney for you (and your spouse if you have one). Should something happen to you, it's important to be sure that your heirs and your charities are similarly taken care of by keeping your will, durable powers of attorney for health care and finance, living will, and any trusts up to date.