In this article:
- What Is a Financial Windfall?
- How Much Money Is Considered a Windfall?
- What to Do With a Financial Windfall
From discovering a $20 bill in the pocket of your winter coat to receiving a surprise bonus at work, financial windfalls make life a little sweeter. A financial windfall is money you didn't expect to receive. Financial windfalls can range in size from hundreds to millions of dollars, but whatever the amount, they offer an opportunity to improve your financial situation. Here's a closer look at where financial windfalls come from and what to keep in mind should you receive an unexpected influx of cash.
What Is a Financial Windfall?
The Cambridge English Dictionary defines a windfall as "an amount of money that you receive unexpectedly." Either the amount of the money, the money itself or both could be a surprise. For example, you might know your parents are leaving you an inheritance but be astonished that it's $10 million. Or you might receive an inheritance of $1,000 from a distant cousin and be surprised because you never knew the person existed.
Examples of a Financial Windfall
Financial windfalls can come from many sources. Some of the most common windfalls include:
- Profit from the sale of a home or other property
- An employee bonus
- Prize or lottery winnings
- A life insurance payout
- Inheritance of money or property
- Exercising stock options
- The payout from a lawsuit
- A tax refund
What differentiates a financial windfall is that it's unplanned for and not part of your regular income and budget. This can be a win for your finances, but depending on the size of the windfall, can also present new money management challenges.
How Much Money Is Considered a Windfall?
What dollar figure constitutes a financial windfall? There's no precise definition. An unanticipated $250 could be a windfall for a student on a low income, for instance. The amount you consider a windfall will depend on your financial situation and perceptions.
What to Do With a Financial Windfall
Before giving in to the temptation to spend your windfall impulsively, take some time to think through the wisest uses for your newfound cash. Stashing the money in a high-yield savings account can help you maximize interest earnings while you decide what to do with your windfall.
Depending on the source and size of your windfall, here are some options to consider.
- Plan for any tax bills. Inheritances, prizes or winnings and gains from selling property or stocks may be subject to federal, state and local income taxes, and possibly estate taxes or capital gains taxes. A tax adviser can help you determine how much you'll owe and what to set aside for Uncle Sam. Did your windfall come from a tax refund? Revising your withholding can help you keep more of your money during the year, instead of letting the government hold onto it.
- Pay down high-interest debt. In 2022, U.S. consumers carried $5,910 in credit card debt on average, Experian data shows. With the average annual percentage rate (APR) on credit card balances topping 20% in 2023, paying off credit card debt can mean significant savings. By lowering your credit utilization ratio, paying down high-interest debt could also boost your credit score.
- Start or build your emergency fund. Experts advise having at least three to six months' worth of essential living expenses set aside in a savings account earmarked for emergencies.
- Increase contributions to tax-advantaged retirement accounts. You'll not only build your nest egg but also reduce your taxable income, potentially balancing out taxes owed on your windfall.
- Create a sinking fund. Save for big goals, from a family vacation or a new car to a down payment on a home, by putting money into a dedicated savings account.
- Save for your children's education. Consider opening a 529 savings plan to set money aside for their college funds.
- Invest the money. If you've maxed out your retirement plan contributions, consider expanding into stocks, bonds, real estate and other investment vehicles to create additional wealth.
- Make a budget. A life-altering financial windfall can lead to lifestyle creep, where you start overspending without even noticing. Developing a budget can help you determine the best uses of your money.
- Consider working with a financial professional. A financial advisor can help you minimize taxes on a large windfall and create a plan for using the money to achieve your financial goals.
- Revise your estate plan (or make one). A major financial windfall can make it easier to provide for your loved ones after your death. Create an estate plan to reflect your new financial situation; consider purchasing more life insurance too.
The Bottom Line
It's easy to see how a windfall of hundreds of thousands of dollars can change your life. But a windfall of any size can have a lasting impact on your finances, depending on how you use it. Having good credit makes a difference too. While reviewing your finances in the wake of a windfall, be sure to check your credit report. Then take steps to improve your credit score if necessary—for example, by using your unexpected windfall to pay down debt.
